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RESTORE

ILLINOIS:
A F O U N D AT I O N FO R G R OWTH

February 2019
The Civic Committee of the Commercial Club of Chicago
The Civic Committee is composed of the senior leaders of the Chicago
region’s leading employers. Its mission is to improve the Chicago region
as a place to live, work, and conduct business.

We have a strong history of taking on broad, systemic issues that impact the Chicago region and
Illinois and call for a sustained effort. These projects change over time and currently include efforts
to:

Restore the State of Illinois to fiscal stability;


Improve the educational system in Chicago for all who live here;
Solidify Chicago’s position as a global transportation hub;
Grow Chicago’s position as a top-tier technology ecosystem that promotes inclusive economic
growth;
Help organizations become veteran-friendly employers.

We also work closely with the organizations we have helped create over our history:

The Civic Consulting Alliance builds pro bono teams of business experts, government leaders,
and its own professional staff to work on transformative public sector challenges, such as
reducing crime, increasing the availability of high-quality healthcare, improving the educational
system, and promoting economic growth.
Kids First Chicago is dedicated to ensuring Chicago’s public school system provides high-quality,
accessible options for all Chicago families.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 1


Tax Policy Task Force
The Civic Committee formed the Tax Policy Task Force in the summer of
2015 to examine the fiscal challenges facing the State of Illinois and to
propose solutions. The Task Force issued its previous report, Bringing
Illinois Back: A Framework for our Future, in May 2017.

This report, Restore Illinois: A Foundation for Growth, is an update and expansion of Bringing Illinois
Back and presents the ongoing work of the Task Force to address the State’s financial situation.

Tax Policy Task Force Members Civic Committee Authors


Larry A. Barden Mary K. Wagoner, Lead Author
William J. Brodsky Dea C. Meyer
John A. Canning, Jr. Martha D. Boudos
James S. Crown Kirsten M. Carroll
Tyrone C. Fahner
Jay L. Henderson (Chairman)
Robert A. Livingston
Andrew J. McKenna
Michael G. O’Grady
John W. Rogers, Jr.
Michael J. Sacks
Jennifer F. Scanlon
Frederick H. Waddell
Kelly R. Welsh

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Restore Illinois:
A Foundation for Growth
Executive Summary

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 3


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Illinois is a world-class place to live, work, and do business.

The State’s economy is one of the largest in Given this context, Civic Committee leadership
the world and represents a diverse mix of has grown increasingly concerned about the
industries.1 The City of Chicago, the economic deterioration of the State’s finances and its
engine of the Midwest, has been the top city effect on the jobs climate. As a result, in 2015
in the United States for direct foreign Civic Committee leadership created a Tax
investment for the last six years2 and was the Policy Task Force (“Task Force”) to analyze the
top location for corporate relocations and State’s financial challenges and identify tax
expansions in 2017.3 The State’s workforce is and budget policies to address them. The
skilled and well-educated, with approximately Task Force met with a variety of tax policy and
one-third of the State’s workforce holding at state finance experts and developed a
least a bachelor’s degree.4 In addition, Illinois’ financial framework (“Framework”) for the
central location and diversified transportation State of Illinois that if implemented fully
network have solidified the State as an would put the State government back on the
essential transportation hub for the entire path to fiscal solvency and help restore
country. confidence in the State’s fiscal future.

Despite Illinois’ many competitive advantages, In 2017, the Task Force released Bringing
it faces significant challenges. The State’s fiscal Illinois Back: A Framework for our Future. This
uncertainty and instability hurt our economy report addressed the key issues facing the
and cause many families and businesses to State and included the Task Force’s Financial
leave Illinois and others not to come here. Framework, as well as several additional
Illinois’ population has declined each year reforms to improve the jobs climate.
from 2014-2018, and population loss as a
The State has made progress on many fronts,
percentage of the State’s population for 2017-
but there is still a long way to go to ensure
2018 was second highest in the nation behind
stability and certainty in the State’s jobs
West Virginia. These challenges have been
climate going forward. In addition, having a
abundantly covered by local, national, and
new Governor and General Assembly
global media and shape a negative narrative
presents an opportunity to pursue the bold
of Illinois.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 5


action necessary to stabilize Illinois’ finances recommendations focus on the areas in which
and lay a foundation for economic growth. As the State has room to make changes without
a result, the Task Force has produced an increasing its negative outlier status in order
updated and expanded report, Restore Illinois: to mitigate the overall impact on the State’s
A Foundation for Growth, to evaluate the jobs climate and Illinois taxpayers wherever
progress that has been made since 2017 and possible.
to identify actions that still need to be taken
This report represents a comprehensive set of
by State government to improve its financial
recommendations that can be enacted
standing and jobs climate.
immediately. These recommendations do not
The Task Force selected a five-year time frame require constitutional amendments, which at
for full implementation of our the earliest would take several years to go
recommendations, reflecting our belief that into effect because it is critical that the State
swift and comprehensive action is required to move forward with implementing fiscal reforms
improve Illinois’ fiscal health and combat the now to ensure Illinois is on a viable path to fiscal
narrative that the State is a questionable health and stability. If the State enacts these
choice to live, work, and do business. reforms, Illinois will have addressed its
financial challenges and given people and
Although we recognize that not every
businesses certainty about the State’s future,
recommendation may be adopted on the
which is a critical element in promoting job
schedule we have prescribed, some policy
growth in Illinois. Without a growing economy,
prescriptions should be a higher priority, such
the State will not be able to move forward to
as eliminating the structural budget deficit
provide vital services to all Illinoisans and
and increasing contributions to the State’s
focus on other future growth initiatives.
pension funds up front to stop the growth in
the State’s pension debt faster than under the Although there have been several policy
current schedule. The key is instituting a plan changes enacted since we published Bringing
that will achieve our recommendations in a Illinois Back, the legislature has not yet
defined time frame rather than deferring implemented many of the recommendations
action on critical issues to the future. of the Framework. We continue to believe that
the State should adopt the Financial
While this report focuses primarily on State
Framework created by the Task Force and
finances, we recognize that the impact of
pursue policy solutions consistent with it. Part
solutions to the State’s problems will not
1 of this report provides an overview of the
occur in a vacuum and that Illinois taxpayers
components of the Financial Framework.
are already burdened by high taxes,
particularly property taxes. Our

It is critical that the State move forward with implementing fiscal


reforms now to ensure Illinois is on a viable path to fiscal health
and stability.

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Part 1: Pursuing these policies, in turn, will lay the
groundwork for an upgrade in the State’s credit
Civic Committee Financial rating to AA. This is a goal of the Task Force not
only because it will reduce the cost of borrowing
Framework for the State, but, more fundamentally, because
the rating is a measure recognized throughout
The Financial Framework consists the world of the State’s fiscal health and
of five elements: stability.

The Financial Framework does not specifically


Implement long-term financial planning and
address a capital budget. Nevertheless, the Task
increase fiscal transparency;
Force recognizes that the State has significant
Eliminate the structural budget deficit and capital needs that should be addressed in the
unpaid bills, establish a reserve fund, and near term. For example, the Regional
implement a new funding plan to pay down Transportation Authority (RTA) estimates it will
the approximately $130 billion in unfunded
need $38 billion over 10 years to bring the mass
liabilities of the State’s pension funds;
transit system in the Chicago metropolitan
Scrutinize the entire State budget for region into a state of good repair. 5 In addition,
spending reductions; the Illinois Department of Transportation
Reform the tax system to reduce Illinois’ estimates that it will require $1.7 billion each
negative outlier status and raise revenues, year to maintain existing highway and transit
as needed, in a way that minimizes the infrastructure. 6
negative impact on Illinois’ competitiveness;
and We believe that the State should adopt a long-
term, transparent capital investment plan that
Establish goals and metrics to measure the relies on recurring revenue sources and
State’s progress.
performance-based project funding so that
The issues facing the State are interconnected, future capital investments are strategic, well
and the elements of the Financial Framework thought out, and sustainable. Developing such a
represent a balanced, comprehensive plan that plan will bolster Illinois’ position as a key
reflects that interconnectedness. The State transportation hub and promote economic and
should adopt all elements of the Framework to job growth.
maximize the effectiveness of reform efforts;
In addition to the Financial Framework
piecemeal implementation may do more harm
described above, the Task Force has identified
than good.
several additional reforms to improve the jobs
We believe that it will require $8 billion a climate which are detailed in Part 2:
year in expenditure cuts and revenue
Local Government Consolidation;
increases over the next five years to put
Illinois back on the path to financial stability. P-12 School Funding Reform; and
Identifying $8 billion a year will allow the State Workers’ Compensation Reform.
to fully eliminate the structural budget deficit,
pay down the remaining bill backlog, establish
an appropriate reserve fund, and properly
address the State’s unfunded pension liabilities.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 7


Illinois’ Current Performance implementing a graduated income tax or
adjusting pension benefits for current plan
Illinois has many strengths and enjoys many
participants – since passing any amendment
competitive advantages over other states.
would be a challenging, multi-year process,
Despite the State’s numerous advantages,
and delays will only make the State’s fiscal
Illinois’ economic growth has lagged its peers
challenges greater.
in recent years and compares unfavorably to
other states in several significant ways:
I. Implement long-term financial
In a March 2018 poll conducted by the planning and increase fiscal
Paul Simon Public Policy Institute at transparency
Southern Illinois University, 84% of
respondents said that the State was Compared to other states, Illinois’ financial
headed in the wrong direction;7 planning processes are incomplete and opaque.
Budget documents tend to focus on the General
Illinois’ credit ratings, which serve as a
Funds budget, which includes only about half of
useful proxy for a state’s fiscal health, are
the State’s spending. Revenue and expenditure
the worst in the nation. Illinois’ S&P credit
rating (BBB-) sits one notch above a junk forecasts vary depending on which source they
bond rating;8 and come from (the Governor’s Office of
Management and Budget or the Commission on
Illinois ranks poorly compared to other
Government Forecasting and Accountability)
states on key economic metrics. For
and rarely include projections beyond three
example, Illinois is:9
years. In addition, the State frequently uses
o 41st out of the 50 states for short-sighted budgetary practices – such as one-
year-over-year Gross State time revenues, interfund borrowing, and
Product (GSP) growth (for borrowing to fund current operations – to
2016-2017); and “balance” the State’s budget.
o 36th out of the 50 states for
year-over-year employment To identify best practices of other States, we
growth (for December 2017- have used the Volcker Alliance’s Truth and
December 2018). Integrity in State Budgeting report (issued in 2017)
as a starting point. The report focuses on five
The State needs to make significant changes key areas (budget forecasting, budget
in order to right its fiscal ship and reduce maneuvers, legacy costs, reserve funds, and
uncertainty for job creators. The elements of transparency) and grades states based on their
the Civic Committee’s Financial Framework specific policy practices.
identify the changes Illinois needs to make
and are based on best practices of successful The Civic Committee’s recommendations for
states. improving Illinois’ financial planning processes
and transparency are consistent with the best
It is important to note that the policy options practices outlined in the Volcker Alliance report.
described throughout the report assume the Our recommendations include:
current state of affairs; that is, they do not
require constitutional changes to implement. Establishing clear financial objectives and
We do not rely on policy changes that would articulating metrics that will illustrate
progress towards those goals in both the
require a constitutional amendment – such as
short and long terms;

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Focusing on long-term (at least five-year) the Normal Cost plus Interest payment) so
financial projections for revenues and stakeholders can evaluate the adequacy
expenditures; of the State’s pension contribution and
see how current funding compares to that
Scrutinizing all funds under the control of
benchmark and how it impacts the total
the State during budget negotiations
amount of pension liabilities.
(including General Funds and Other State
Funds, as well as revenue-sharing with
II. Eliminate the budget deficit and
local governments);
unpaid bills, establish a reserve fund,
Ensuring that expense forecasts
and implement a new funding plan to
accurately and completely reflect the full
expected costs of programs; pay down the State’s $130 billion
unfunded pension liability
Creating consensus revenue forecasts
that do not rely on one-time revenues to In order to reach financial stability over the
balance the budget and focus on next five years, the State needs to right-size its
sustained revenue sources; budget and eliminate the structural budget
Producing timely financial statements that deficit, pay down the remaining bill backlog,
report revenues and expenses (as well as establish a reserve fund, and implement a
assets and liabilities) that are updated at new pension funding plan.
key points of the budget cycle;
Since the increase in personal and corporate
Including baseline budgets in budget income taxes at the beginning of FY18, the
documents that show projected revenues structural deficit is much smaller than it was
and expenditures absent major policy
when we published Bringing Illinois Back.
changes; and
Nevertheless, it has not been completely
Publishing the aggregate State pension eliminated. As shown in Table 1 below, the
contribution (from General Funds and State’s annual structural deficit is projected to
Other State Funds) as well as standard be as much as $3.4 billion from FY19-24.
pension contribution benchmarks (e.g.,

Table 1: Baseline General Funds Budget ($ Millions)

Source: Governor’s Office of Management and Budget, “General Funds Financial Walk Down FY19-FY24.”

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 9


As a result of past budget deficits and the downturns. Depending on the size of the
two-year budget impasse, the State still has State’s budget over the next five years
unpaid bills that will have to be paid down, (reserve fund requirements are frequently
which will total approximately $7.8 billion by determined as a percentage of revenues or
the end of FY19.10 expenditures), a healthy reserve fund would
be approximately $4-5 billion.11
In addition, the State should implement a new
pension funding plan that will speed up the Once the State eliminates the bill backlog and
time frame for getting to a point where establishes an appropriate reserve fund, it
contributions are sufficient to keep the should consider rolling back the
unfunded liabilities from growing (“tread recommended tax increases as well as
water”), is budget sustainable (will not evaluate its top fiscal priorities and allocate
significantly worsen crowding out of all other these resources as necessary to ensure a
budget spending imperatives), and will balanced budget, adequate spending on
amortize the remaining unfunded liability education, sufficient pension contributions,
after the plans reach 90% funded. As and appropriate levels of State services.
described in the “Pension Reform” section,
To achieve the goal of eliminating the budget
implementing our “2+2” Plan will require the
deficit and unpaid bills, establishing a reserve
State to contribute an additional $2 billion a
fund, and implementing a new pension
year beginning with the FY20 contribution.
funding plan, the State will need to identify
Finally, the State should follow best practices approximately $8 billion a year in spending
of other states and establish a reserve fund to cuts and/or revenue increases from FY20-
cushion against future budgetary shocks, FY24, as summarized in Table 2 below.
including the potential impact of economic

Table 2: Summary of the Gap ($ Millions)

PROJECTED PROJECTED PROJECTED PROJECTED PROJECTED


FISCAL YEAR
2020 2021 2022 2023 2024

$2,763 $3,434 $3,276 $3,199 $3,275

Pay Down the


$1,500 $1,500 $1,500 $1,500 $1,500
Bill Backlog

Establish a
$1,000 $1,000 $1,000 $1,000 $1,000
Reserve Fund

Incremental
Pension $2,000 $2,000 $2,000 $2,000 $2,000
Funding

TOTAL GAP $7,263 $7,934 $7,776 $7,699 $7,775

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Figure A below shows several policy options that could be implemented to reach this goal.

Figure A: Elements of a Solution

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 11


Pension Reform The status quo is not sustainable, and the
State needs to reform its public pensions.
The challenges facing Illinois’ public pension
However, options to reduce the unfunded
systems – massive unfunded liabilities,
liability are limited due to constitutional
extremely low funded ratios, and annual
constraints and the recent Illinois Supreme
contributions that are crowding out other
Court decision that overturned benefit
State spending – are significant and well
reforms. Future reforms should expand their
known. Across all five pension systems,
focus to include creating a credible plan for
unfunded liabilities total roughly $130 billion,
paying down the unfunded liabilities of Illinois’
and the funded ratio is only 40%.12 In addition,
pension systems, while also mitigating the
pension contributions currently account for
negative impact of pension contributions on
nearly 20% of the General Funds budget,13 a
the provision of important government
share that will likely increase as the State’s
services.
statutorily required pension contributions
continue to grow over the next 26 years. Any new funding plan the State pursues
should meet the following criteria:
When the State adopted its current pension
contribution schedule, it was designed in a Structure contributions in a budget
way that shifted costs to the future. The sustainable manner that will not
schedule has been in place for 24 years, but significantly worsen crowding out with
to date, the State’s pension contributions have extremely high, back-end loaded
not reached a level sufficient to keep the contributions;
unfunded liabilities from growing. Instead, it Increase pension contributions up front
relies on higher contributions in the final so that contributions reach the point at
years of the schedule to amortize the which contributions are sufficient to keep
unfunded liabilities; pension contributions will the unfunded liability from growing faster
grow at a 3.3% compound annual growth rate than under the current schedule; and
until they reach approximately $19.5 billion in Provide a plan to amortize the remaining
FY45 (approximately $10 billion in 2018 unfunded liability after the funds reach
dollars).14 Unless the State’s budget growth 90% funded.
keeps pace with or exceeds the pension
contribution growth, it will become
increasingly difficult to make the statutorily
required pension contributions without
severely cutting services, raising taxes to
unreasonable levels, or some combination of
both.

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“2+2” Plan under the current status quo contribution
schedule. And the “2+2” Plan would eliminate
The Civic Committee recommends the “2+2”
the State’s unfunded pension liability, which
Plan, which meets the above requirements.
under current police is projected to be $37.7
The “2+2” Plan would restructure the pension
billion in FY65.
contribution schedule so that the State’s
baseline contributions would grow at 2% a Another benefit (as shown in the graph below)
year (which translates to a roughly $500 is that not only are the State’s pension funds
million reduction in the projected FY20 projected to reach the “tread water” level
contribution under the current schedule) and faster, but under the “2+2” Plan, the unfunded
the State would provide an additional $2 liability is projected to peak at a lower level
billion in supplemental contributions until the than under the Status Quo pension schedule.
plans are 90% funded. Then, this plan would It would remain lower than the projected
amortize the remaining unfunded liability unfunded liability for the Status Quo pension
over 10 years. Under the “2+2” Plan, the schedule for all years.
State’s pension plans are projected to reach
Additionally, the State should consider making
93% funded by FY45. The “2+2” Plan also
changes to pension fund governance to
produces total financial benefits of
ensure that funds are held to high standards
approximately $46 billion. The State’s
(which may, in turn, lead to higher returns
contributions over time (FY20-FY65) would be
and/or funding levels).15
about $8.6 billion less in real dollars than

Figure B: Unfunded Liability Comparison, Status Quo Contribution Schedule vs. “2+2” Plan

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 13


current plans to “platinum” plans that would
III. Scrutinize the entire State budget
require significantly higher employee
for spending reductions
premium contributions to maintain current
The State should intensify its focus on plan benefits. This proposal was projected to
identifying opportunities for savings in the save the State approximately $470 million for
State budget. These savings should be FY19;17 however, contract negotiations were
generated through improving the efficiency of at a stalemate and the subject of litigation, so
service provision and ensuring that resources the proposal was not enacted. We support the
are directed to the State’s highest-priority State reforming and re-designing employee
programs. healthcare plans to retain solid benefits for
State employees, but make them more
General Funds Savings: Group Health consistent with the benefits received by
Insurance for Active Employees private sector employees.
The State Employees’ Group Insurance
Program (SEGIP) provides medical, dental,
General Funds Savings: Create a New Retiree
vision, and life insurance coverage to the Healthcare Plan for New Employees
following (and their dependents): active State Retiree healthcare under SEGIP provides
employees, elected State officials, and State another avenue of potential savings.
university employees. It also provides retiree Currently, retirees receive a 5% premium
healthcare benefits for members of the subsidy for every year of creditable service
State’s five pension plans (and their (i.e., retirees with 20 years of creditable
dependents) except for retirees eligible for service receive a 100% premium subsidy). As a
coverage through the Teachers’ Retirement result, they tend to pay a very small portion of
Insurance Program (TRIP) or College their healthcare costs. (For FY19, retired SEGIP
Insurance Program (CIP). Total costs for SEGIP enrollees are projected to pay only 6.3% of
in FY18 (excluding interest costs) totaled their healthcare costs.)
approximately $2.8 billion, with medical care
coverage accounting for approximately 85% The State has attempted to change the
of the total.16 premium subsidy in the past, but the Kanerva
v. Weems case held that the State’s subsidies
As part of recent contract negotiations, toward the cost of retiree healthcare coverage
reforms were proposed that would require are constitutionally protected and cannot be
employees to pay a larger share of their diminished or impaired. However, the ruling
healthcare costs in order to reduce the does not apply to new employees, and the
medical care coverage costs to the State for State could create a separate retiree
active employees. These reforms would healthcare plan for new employees with a
establish a multi-tiered system that offered reduced premium subsidy structure that
plans with different combinations of monthly would be applied going forward. It is unclear
premiums and plan benefits (including out-of- how much the State could save from reducing
pocket costs such as deductibles and co-pays) the premium subsidy for new employees, but
that employees could choose from. The tiers the State should pursue the implementation
range from “bronze” plans that would require of a separate retiree healthcare plan for new
no employee premium contribution but employees.
would have higher out-of-pocket costs than

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Other Expenditure Reduction Opportunities IV. Reform the tax system to reduce
The State also should expand the frame of the Illinois’ negative outlier status and
budget beyond the General Funds to include raise revenues, as needed
Other State Funds. Currently, budget A state’s tax climate is an important
negotiations focus on the General Funds, consideration for businesses deciding where
which ignores nearly half of total State to expand or locate and for individuals
spending. This narrow view of the State deciding where to live. It is important that
budget can be misleading when analyzing Illinois’ tax structure is carefully designed so
total programmatic spending, since several that it raises sufficient revenues to pay for
key State programs receive funding from a critical programs without making the State an
combination of General Funds, Other State outlier.
Funds, and federal funds. Looking only at the
General Funds portion of spending will give an Despite the many changes to the tax system
incomplete picture of programmatic that occurred when the FY18 budget was
spending. The State should adopt an All Funds enacted, there are still several ways in which
budget model that aggregates General Funds Illinois is an outlier compared to other states::
and Other State Funds into a smaller number Other states levy taxes that Illinois does
of revenue and spending categories. not;
Local government revenue sharing also Illinois imposes some taxes that other
should be scrutinized. Illinois has nearly 7,000 states do not; and
units of local government, by far the most of Illinois has burdensome administrative
any state, and many of these governments procedures.
receive significant funding from the State each
The Task Force’s policy recommendations
year (such as through the Local Government
reflect the need to make Illinois less of an
Distributive Fund). The lack of transparency
outlier compared to other states while raising
into most local government finances makes it
sufficient revenues to pay for critical State
nearly impossible to thoroughly review their
services. Our recommended policy options to
revenues and expenditures, which suggests
reform the tax system and raise sufficient
that there are opportunities to improve
revenues include:
efficiency and reduce the need for revenue
through measures like shared services, joint Increasing the personal income tax to
purchasing, and consolidation. Local 5.95% would bring in an additional $3.7
government consolidation will have the billion;18
largest savings impact on local revenue Increasing the corporate income tax base
sources (e.g., property taxes), but rate to 8% would raise an additional $300
consolidation could eventually produce million;19
savings for the State.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 15


Ending the exclusion of retirement income To measure the State’s progress, the Task
from the personal income tax and Force has identified several short- and long-
increasing the value of the 65 and over term goals. The timeline for achieving short-
exemption from $1,000 to $15,000 to term goals is within the first fiscal year after
protect senior citizens with low and full implementation of the Framework; long-
moderate incomes would raise $1.9
term goals are to be achieved within five years
billion;20
of full implementation of the Framework.
Applying the sales tax to a set of
consumer services would raise an Short-Term Goals
additional $500 million;
Implementation of a long-term financial
Repealing the capital-based tax portion of planning process that is transparent,
the Franchise Tax. Repealing all parts of implements best practices, and includes
the Franchise Tax would cost the State the entire State budget;
$205 million, but keeping the fee-based
Approval of a structurally balanced annual
portion would reduce revenue loss to the
budget and beginning to amortize the
State;21
State’s unpaid bills;
Eliminating the Estate Tax would cost the
Increasing pension funding levels
State $290 million;22
immediately to accelerate the time frame
Amending the Illinois False Claims Act to to stop the growth in the State’s unfunded
exclude all tax laws; and liabilities;
Amending the Uniform Penalty and Implementing meaningful expense
Interest Act to better align Illinois’ tax reductions based on a comprehensive
penalty structure with other states. review of spending across the entire State
budget; and
V. Establish financial goals and metrics
Reforming tax provisions and practices
to measure the State’s progress
that make Illinois an outlier compared to
The overarching goal of the Task Force is to other states.
take a comprehensive approach to improving
the State’s finances and business climate. Our
Framework provides a blueprint for the policy
changes necessary to bring Illinois back to
financial solvency as reflected in an AA credit
rating. Together, our recommendations
provide a comprehensive plan that will reduce
uncertainty and change the narrative about
Illinois’ fiscal health and lead to improvement
in Illinois’ economic and jobs performance.

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Long-Term Goals The S&P credit rating incorporates several
different metrics into one aggregate score,
Sustained achievement of the median
and includes:
level of performance among the 50 states
for employment growth, GSP growth, and Debt and liability metrics (including
unemployment rate; pension liabilities);
Achievement of “Top 10” performance Budgetary performance metrics (including
among all 50 states for per capita income; the level of reserves);
Elimination of the State’s unpaid bills; and Economic indicators (including Gross State
Establishment of a reserve fund that Product and income per capita);
equals more than 8% of Government framework measures
revenues/expenditures.23 (including whether there is a balanced
budget amendment); and
It is also a goal of the Task Force to achieve an Financial management measures
upgrade in the S&P credit rating to AA (including measures around budget
because it serves as a useful proxy for forecasting).
financial health.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 17


18
Part 2: requirements vary depending on the type and
size of government, and there are no
Additional Reforms to consistent accounting standards for these
reports. We reiterate the data-related
Improve the Jobs Climate recommendations we made in Bringing Illinois
Back:
Part 2 of this report provides an
Require all local governments to report
overview of key jobs climate- full and accurate financial data to a single
related issues and updates on State repository;

policy changes that have been Require all local governments to report
information in a standardized, consistent
enacted since our 2017 report format; and
was published. These policy Provide tools, training, and other supports
to local officials to meet these new
issues include:
requirements.

Local Government Consolidation; In addition, we recommend that the State


take action to remove statutory roadblocks to
P-12 School Funding; and
consolidation and enact the
Workers’ Compensation Reforms. recommendations included in the final report
of the 2015 Local Government Consolidation
Local Government Consolidation
and Unfunded Mandate Task Force, including:
Illinois has the largest number of local
Empowering Illinois citizens to consolidate
governments of any state in the nation. This,
or dissolve local governments via
combined with inconsistent and incomplete
referendum;
financial reporting, makes it nearly impossible
to provide effective oversight and a lack of Expanding DuPage County’s consolidation
transparency severely hampers efforts to program to all 102 counties;
identify opportunities for efficiency and Allowing all townships in the State to
savings. consolidate with coterminous
municipalities via referendum;
With nearly $30 billion24 in revenue, the
money going to the 7,000 units of local Protecting the Intergovernmental
Cooperation Act to preserve the ability of
government is substantial and should receive
local governments to coordinate; and
closer scrutiny. If local governments
consolidated, achieved operating efficiencies, Empowering State agencies to incentivize
and reduced costs, the State could benefit local government consolidation and
financially in addition to the likely savings to cooperation..
local taxpayers. However, a key impediment
to consolidation is the often poor quality of
local government data. Reporting

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 19


P-12 School Funding
Since we released Bringing Illinois Back in Provisions that would adjust for pension
2017, the General Assembly passed Senate costs in the formula if non-CPS districts
Bill 1947 (the “Evidence-Based Funding for ever became responsible for paying their
Student Success Act”) based on evidence- pensions;
based funding principles, including the The Property Tax Relief Pool;
calculation of a unique Adequacy Target for
Ensuring that the State fully meets the
each school district based on student
$350 million funding target each year; and
demographics, accounting for local resources
and differentiating what each district is The funding formula’s interaction with
expected to contribute, and the creation of a federal education funding.
distribution system that ensures State money
Workers’ Compensation Reforms
goes to the neediest districts first. It
fundamentally changes the way the State Companies often consider the cost of workers’
provides education funding to local school compensation insurance in a given state when
districts. Key components of the law include: deciding where to locate, making it an
important component of a state’s jobs
An evidence-based school funding
climate. Illinois historically has been a higher-
formula that prioritizes school districts
cost state for workers’ compensation
with the greatest need and least property
premiums and despite improvement
wealth;
stemming from significant reforms enacted in
A $350 million year-over-year increase in 2011, the State continues to have higher costs
education funding (contingent on annual than the majority of states. Illinois’ workers’
appropriations) that is distributed through
compensation premium rates are the 22nd
the new formula;
highest in the country.25
Pension parity for Chicago Public Schools
(CPS) by providing State funding for the Workers’ compensation premiums reflect the
normal cost of pensions and retiree overall cost of providing workers’
healthcare costs through new provisions compensation benefits in a given state, which
in the State’s pension code; and can vary significantly depending on the rules
Recognition of CPS’s payments to and regulations in place. Broadly, there are
amortize its unfunded pension liabilities in three major determinants of workers’
the school funding formula. compensation costs: causation, medical care
costs, and indemnity benefits.
This law represents an historic step forward in
establishing a school funding system that is Compared to other states, Illinois has a
fair and equitable for all students. However, relatively broad causation standard, requiring
there are a few areas the State needs to only that the injury stemming from
monitor going forward to ensure that the law
works as intended, including:

20
employment is a cause of the injury (e.g., any The State enacted workers’ compensation
pre-existing conditions are not taken into reforms in 2011, which reduced workers’
account). Once the injury is determined to be compensation costs overall. However, there
work-related, it is fully compensable under are additional cost reduction measures the
workers’ compensation. State should adopt to align more closely with
best practices:
Illinois’ medical care costs for claims in the
workers’ compensation system tend to be Defining traveling employees in statute
higher than other states. Illinois’ medical costs (e.g., codifying the factors that determine
for claims with more than seven days of lost whether or not an employee is required to
time are 24% higher than the median for travel for work);
comparison states.26 This is due to the fact Following best practices of other states
that Illinois is on the high end of both the and tying medical fee schedules to
prices paid for medical treatment and Medicare rates;
utilization rates (visits per claim and services Adopting limits on utilization of certain
per visit). Other states control these costs by medical services;
tying their medical fee schedules to Medicare
Implementing best practices for reducing
and implementing utilization limits; by
the average length of temporary disability;
contrast, Illinois’ fee schedule is not tied to
and
Medicare, and the State does not have any
utilization limits in place. Adjusting the use of American Medical
Association (AMA) guides for determining
In addition, indemnity benefits per claim in impairment so that AMA guides have
Illinois tend to be higher than most other more weight but are not mandatory.
states ($22,911 compared to the median
state’s cost of $17,815).27 Broadly, this is due
to three factors: weekly benefit amounts for
temporary disability, the duration of
temporary benefits, and the benefit structure
for permanent disabilities.

Conclusion
The challenges facing Illinois are considerable, yet they are surmountable if the State acts urgently
to stabilize its finances and make key reforms to improve Illinois’ business climate. The
recommended reforms to improve the jobs climate offer an opportunity to help turn around the
State’s reputation and will make Illinois an even more attractive place to live, work, and do business.
The Financial Framework developed by the Tax Policy Task Force should be implemented
immediately and will put the State back on the path to fiscal solvency. Most importantly, adopting
the recommendations in the report will provide businesses and individuals confidence and certainty
about the direction of the State so that Illinois can achieve its potential as a great place to live, work,
and do business.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 21


22
Summary of
Expenditure Reductions (pp. 55-61)
Recommendations
Reform healthcare plans for current State
Financial Planning and Transparency (pp. employees (estimated savings: up to $500
31-35) million);
Implement a new retiree healthcare plan;
Implement reforms to the State’s financial
planning processes to focus on the long Reduce State spending through
term and increase fiscal transparency. operational improvements (estimated
savings: $1 billion);
Eliminate the Budget Deficit and Unpaid
Bills, Establish a Reserve Fund, and Implement “2+2” Plan (estimated savings:
Address Unfunded Pension Liabilities (pp. $500 million); and
37-41) Scrutinize Other State Funds for savings.
Eliminate the structural budget deficit; Tax System Changes (pp. 63-70)
Pay down the approximately $7.8 billion
Increase the personal income tax rate to
bill backlog;
5.95% (estimated revenue: $3.7 billion);
Establish a $4-5 billion reserve fund; and
Provide an additional $2 billion in pension Increase the corporate income tax base
contributions to implement a new rate to 8% (estimated revenue: $300
pension funding plan. million);
Eliminate the retirement income
exclusion; increase the 65 and over
Pension Reform (pp. 42-54) exemption to $15,000 (estimated revenue:
Adopt a new pension funding plan that is $1.9 billion);
budget sustainable, reaches the tread Expand the sales tax base to include a set
water contribution level faster than the of consumer services (estimated revenue:
current schedule, and creates a plan to $500 million);
amortize the remaining unfunded liability
Eliminate the Franchise Tax (estimated
after the pension plans reach 90% funded;
revenue loss: $205 million);
and
Eliminate the Estate Tax (estimated
Examine governance of State and local
revenue loss: $290 million); and
pension funds.
Reform administrative practices to make
them less burdensome.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 23


Establish Goals and Metrics to Measure P-12 School Funding Reform (pp. 85-89)
Progress (pp. 71-74)
Monitor key components of the new
Implement a set of long- and short-term funding formula to ensure they work as
goals and metrics to measure the State’s intended.
progress. Workers’ Compensation Reforms (pp.91-96)
Local Government Consolidation (pp. 76-
Implement additional reforms to reduce
83)
costs and align with best practices of
Pursue reforms to improve local other states..
government financial data; and
Remove statutory barriers to local
government consolidation.

24
Restore Illinois:
A Foundation for Growth
Full Report

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 25


26
Introduction
With its large, diversified economy, educated workforce, abundant
natural resources, and prime location, Illinois is the economic engine of
the Midwest, with Chicago as its cultural, business, educational, and
financial center.

One of the State’s greatest assets is its diverse Illinois has also grown as a technology hub,
and skilled workforce. Approximately one- with Chicago ranking 7th among U.S. cities in
third of the State’s workforce holds at least a terms of percentages of job postings that are
bachelor’s degree, ranking higher than any in disruptive technology roles.37 In addition,
neighboring state.28 In the City of Chicago, the Illinois ranks highly in producing STEM
share of adults with at least a bachelor’s (science, technology, engineering, and math)
degree is even higher, at approximately graduates, ranking 6th for graduating
37%.29 Chicago is second only to Boston in its bachelor’s degrees in STEM, 4th in master’s
number of universities, and the State is home degrees, and 7th in PhDs. Furthermore, the
to more than 200 institutions of higher State’s growth in STEM degrees outpaces the
education.30 The University of Chicago, rest of the nation.38
Northwestern University, and the University of
Lastly, Illinois’ location in the center of the
Illinois consistently rank in the top of their
country has made it an essential
categories.
transportation hub. Chicago is the nation’s
Additionally, the fundamentals of the State’s premier freight hub with 25% of freight trains
economy are strong. The Illinois economy is and 50% of all intermodal trains passing
fifth largest in the country and 17th largest in through the City.39 Illinois is at the heart of the
the world.31 Thirty-six Fortune 500 companies nation’s interstate system, with the third
are headquartered in Illinois, and highest total of interstate routes and
approximately 1.2 million small businesses mileage.40 O’Hare is the 6th busiest airport in
are based in the State.32 Chicago has been the the world, and it will soon have even greater
top city for direct foreign investments for the capacity with the completion of the runway
last six years33 and was the top location in modernization and a planned $8.7 billion
2017 for corporate relocations and capital improvement plan of the airport
expansions.34 The companies located here facilities.41 The State’s robust transportation
represent a wide breadth of industries, as the network is rounded out with its access to
State ranks highest in the country for industry shipping on Lake Michigan and the Mississippi
diversity, with no single industry employing River.
more than 12% of the workforce.35 In
Yet, despite the myriad strengths of Illinois,
addition, Chicago has a vibrant start-up
the State faces considerable challenges.
culture, ranking 8th globally in the number of
annual start-ups and 8th nationally in total
start-up funding.36

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 27


In fact, uncertainty and deep fiscal problems extent that the State successfully creates a
in Illinois are hurting our economy and future sense of financial reliability and predictability,
prospects, as residents and companies alike Illinois’ business climate will improve, and we
are choosing other locations. There are, of will see the State grow and prosper.
course, Illinois’ well-publicized losses of
The Task Force’s aggressive time frame for full
Amazon’s HQ2 and the Foxconn facility. In
implementation of our recommendations
2018, a Mazda-Toyota joint venture took 4,000
reflects our belief that it is imperative to act
jobs and $1.6 billion in investment to
quickly to restore Illinois’ finances and
Alabama42 rather than central Illinois. General
reputation. However, certain policy
Mills, Mondelez, and Butterball all have closed
recommendations should be given top
operations in Illinois in recent years.43
priority, including eliminating the annual
Moreover, Illinois’ population has declined by
budget deficit and increasing pension
approximately 157,000 since 2014, some of
contributions up front in order to stop the
which is due to the outmigration of
growth of the State’s unfunded liability faster
residents.44
than under the current schedule. The key is
The national media regularly describes the instituting a plan that would achieve our
financial crisis in Illinois, and credit rating recommendations in a defined time frame,
agencies’ negative outlooks on the state have rather than deferring action on critical issues
become common reading, with the State to the future.
teetering one notch above junk status. Media
The fiscal challenges facing the State are
coverage focuses on the State’s structural
considerable, but we believe that adopting the
budget deficit, unpaid bills, lack of budget
Civic Committee’s Financial Framework and
reserve, unfunded pension liabilities, and the
making the Additional Reforms to Improve the
political dysfunction that caused the State to
Jobs Climate will put the State back on the
operate without a budget for over two years.
path to financial stability, reduce uncertainty,
These constant reminders in the press have
and foster economic and job growth. The
reinforced a narrative about Illinois as a
recommendations included in this report will
questionable choice to live, work, and locate
require sacrifice from all Illinoisans, but
businesses.
together they form a clear and balanced
To turn around the negative jobs climate in approach to improving the finances of the
Illinois, we should implement policies and State and making the State a more attractive
reforms that create long-term certainty and place to live, work, and do business.
stability for Illinois businesses or for those
With a new Governor and General Assembly,
businesses considering locating in Illinois. The
we have an opportunity to pursue the bold
State needs to adopt a balanced budget,
policies necessary to stabilize Illinois’ finances
address its bill backlog, create a reasonable
and lay a foundation for economic growth. We
reserve fund, and adequately fund its
urge State leadership to focus on doing what’s
pensions in a way that does not crowd out
best for the long-term health of our State and
other critical spending on services for the
to address these difficult issues immediately.
State. Illinois also should adopt solutions that
align it better with the best practices of other
States to make it less of a negative outlier,
particularly with respect to tax policy. To the

28
Part 1:
The Financial Framework

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 29


30
I. Implement Long-Term Financial Planning and Increase
Fiscal Transparency
The first elements of the Financial Framework are implementing long-term
financial planning and increasing fiscal transparency. As in 2017, the Tax
Policy Task Force calls for the State to adopt measures that would align its
financial planning policies with the best practices of other states.

The State continues to employ irresponsible


budget practices and has not made significant
progress on making its finances more
transparent. The State should also make State
finances more transparent so that important
financial information is easy to find and
understand for all interested parties.

Best Practices of Other States


A useful starting point for identifying the best
practices that other states employ is the
Volcker Alliance’s Truth and Integrity in State
Budgeting report (issued in 2017). The report
evaluates states’ budgeting and transparency
practices and focuses on five key elements:45 Best Practices: Budget Forecasting
Budget Forecasting; Many of the budgeting procedures identified as
Budget Maneuvers; best practices by the Volcker Alliance focus on
ensuring that budgets paint an accurate picture
Legacy Costs;
of a state’s finances and do so well into the
Reserve Funds; and future so that states can plan in advance for
Transparency. changes in revenues and expenditures that will
have a major impact on state finances. States
States are assigned a letter grade (A to D-) based
are evaluated on whether or not they utilize
on the scores they receive on subcategory
consensus revenue estimates, if they provide
questions (e.g., for budget forecasting, a
reasonable (and detailed) rationales for their
subcategory question is “Does the state utilize a
revenue projections, if their budget and
consensus revenue estimate for the
planning documents use multi-year revenue
forthcoming fiscal year or biennium in budget
and expenditure forecasts, and whether or not
and planning documents?”). Illinois’ grades were
the state had to make a material mid-year
generally poor, indicating that the State does
budget adjustment. Illinois performs poorly
not typically follow budget and transparency
in the budget forecasting category and
best practices.
received a D-.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 31


Florida performed well on the budget Best Practices: Budget Maneuvers
forecasting category because it uses
The next category that the Volcker Alliance
consensus revenue forecasting and makes
grades states on is budget maneuvers. A basic
multi-year projections. Florida uses a six-year
tenet of responsible budgeting is to use one-
revenue forecast that is the product of the
time revenues for one-time expenses only
Revenue Estimating Conference, which
rather than using one-time measures to cover
includes representatives of the Governor,
recurring expenses to “balance” the budget.
Senate, House, and the Office of Economic
States are graded based on whether they
and Demographic Research. This office
avoided budget maneuvers, such as
provides six-year expenditure forecasts as
borrowing to pay for recurring expenses,
well.46
using “scoop and toss” financing,50 and using
Illinois, by contrast, does not utilize consensus proceeds from material, non-recurring asset
revenue estimates and tends to rely on sales to fund recurring costs. Most states (22)
estimates from two different bodies: the earned an A because they successfully
Governor’s Office of Management and Budget avoided budget maneuvers during the three-
(GOMB) and the Commission on Government year period the report covers; another 15
Forecasting and Accountability (COGFA). earned a B because they only had limited
Estimates from both bodies are generally reliance on budget maneuvers. Illinois, on the
close, but there have been instances in the other hand, was rated poorly and earned a D-.
past where they have been far apart (by as
Illinois frequently utilizes the types of budget
much as $800 million).47
maneuvers that best practice dictates should
In addition, the State has not consistently be avoided. The FY19 enacted budget
used multi-year revenue and expenditure provides many examples, including relying on
forecasts in its budgeting documents. The $800 million of interfund borrowing and $300
GOMB issues one document each year with million of anticipated proceeds from the sale
multi-year projections, but the projections are of the Thompson Center to balance the
often obsolete by the time the Governor budget.51 (Although the Thompson Center has
issues a proposed budget only a few months yet to be sold, the proceeds from the sale
later. For example, in October 2017, the have been counted as revenues in enacted
GOMB released five-year projections that budgets for several fiscal years including 2018
showed projected total resources of $36.2 and 2019). In addition, although the State has
billion for FY19.48 By the time the Governor made progress on paying down its unpaid
released his proposed budget the following bills, the remaining bill backlog is the legacy of
February, the projected total resources for deferring recurring expenditures to the
FY19 were $38 billion.49 Since there was a future.
significant change in projected resources, the
resource projections for FY20-FY23 made in
October were no longer accurate. Despite the
significant change, the State did not publish
updated projections for the out years.

32
Best Practices: Legacy Costs Best Practices: Reserve Funds
The third area of analysis is how a state The next area evaluated by the Volcker Alliance
handles its legacy costs, including pension report is reserve (or “rainy day”) funds. Reserve
and Other Post-Employment Benefit (OPEB) funds are important from a budgeting
liabilities. When states weigh the need to fully standpoint because they help states weather
fund their retirement costs against the need the ups and downs of the economy and any
to maintain government services, states associated budgetary shocks. These funds make
sometimes short-change their pension funds it less likely that states will have to drastically cut
in order to achieve a balanced budget, rather services or increase taxes to deal with fiscal
than make tough decisions to increase downturns. The reserve fund criteria that are
revenues or cut other expenditures. As such, evaluated include whether there are formal
they push retirement costs (plus interest) onto policies in place governing use and
future generations. The Volcker Alliance grades replenishment of a rainy day fund, if its balance
states based on whether they contribute an is tied to historical trends in volatility (i.e.,
actuarially determined amount to their pension whether it is large enough to help a state if
funds and to public employee OPEB liabilities. there is an economic downturn), and whether
Generally, states have mixed records on how or not there is money in the fund. Illinois earned
they handle legacy costs (only eight states a C for its reserve fund, primarily because of its
earned an A), but Illinois earned a D- on how it formal policies governing the fund (this grade
handles its legacy costs. does not indicate how well it is funded).

Illinois’ pension problems are well known: the Texas serves as a good example for how states
State has an extremely low funded ratio with should approach reserve funds. Its Economic
unfunded liabilities totaling approximately $130 Stabilization Fund is the largest in the country
billion. The State has a pension payment with $9.7 billion in assets as of June 30, 2016
schedule that was set in statute in 1995, but 24 and is supported by natural resource taxes.
years into the schedule, the State’s contribution
Illinois, on the other hand, has never had a
is still not sufficient to keep the unfunded
functional rainy day fund. A law was enacted in
liability from growing.52 Indeed, the State’s low
2004 to build up a rainy day fund using the
contributions are responsible for roughly $48
existing Budget Stabilization Fund, and the goal
billion in increased unfunded liabilities from
was to set aside 5% of General Fund revenues.
FY96-FY17.53 Eventually, pursuant to the
Deposits were to be made into the fund when
statutory schedule, the contributions will
revenues grew more than 4% over the prior
increase to levels high enough to amortize the
year and any withdrawals were meant to reduce
unfunded liability, but that will not occur for
the need for tax increases or short-term
many more years. And when the contribution
borrowing, maintain the credit rating, and
levels are higher, they increasingly crowd out
address budgetary shortfalls.54
other needs for government revenues. The
State is accruing more and more unfunded
liability that must be paid off in the future.

The “Pension Reform” section goes into more


detail about solutions for Illinois’ pension
problem, but it is clear that the State needs to
enact a credible plan to pay down its unfunded
liabilities and better address its legacy costs.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 33


Likely due to the high threshold for requiring Minnesota and Colorado provide excellent
deposits into the fund, the balance of the consolidated budget websites that make
Budget Stabilization Fund has never come financial information accessible to citizens,
close to 5% of General Fund revenues, including budget processes, current and
although there was a balance of previous budgets, budget and economic
approximately $275 million at the end of FY15 forecasts, etc. 56 Utah’s website also provides
(which is far short of the 5% goal). In addition, visual representations of budget information,
the entire balance of the fund was used to including tax incentives/exceptions and the
cover regular operating expenses in FY17.55 As yearly budget.57 California and Alaska also
such, even though the State follows some of serve as positive examples because they
the best practices of other states by having a disclose infrastructure replacement costs,
rainy day fund and clearly defining the which most states do not do.58
process for funding and making withdrawals,
Illinois scores fairly well on transparency,
these processes are not strict enough to
mostly because it has a consolidated website
ensure that the State has a robust fund.
with budget information, and it discloses debt
Best Practices: Transparency and debt service tables. However, simply
making these sorts of documents available
The last area of evaluation is transparency, does not necessarily make them particularly
which is key to ensuring that policymakers useful to the public. For example, one way to
and citizens can easily access and understand make finances more transparent would be for
important information about their state’s budget documents to include a baseline
budget. The Volcker Alliance rates states on budget, then describe how planned policy
whether they have a consolidated website (or changes affected the baseline.59 New York
set of websites) that provide budgetary data, provides such a comparison in its Detailed
whether the state makes tables listing General Fund Gap-Closing Plan, which begins
outstanding debt and debt service available, by showing the baseline budget gap that
whether the state provides a tax expenditure exists prior to any changes, then lists the
budget, and whether it includes the estimated spending and revenue changes the Governor
cost of deferred infrastructure maintenance plans to enact to address that gap.60
liability for its capital assets in budget and
planning documents. Illinois scored relatively
well on this category (earning a B), but other
states serve as aspirational examples for
transparency in budgeting.

34
Recommendations for Financial Creating consensus revenue forecasts
Planning and Increasing Fiscal that do not rely on one-time revenues to
balance the budget and focus on
Transparency
sustained revenue sources;
The Civic Committee’s recommendations for Producing timely financial statements
improving Illinois’ financial planning processes that report revenues and spending (as
and transparency are consistent with the best well as assets and liabilities) that are
practices outlined in the Volcker Alliance updated at key points of the budget
report. Our recommendations include: cycle;
Including baseline budgets in budget
Establishing clear financial objectives
documents that show projected
and articulating metrics that will
revenues and expenditures absent
illustrate progress towards those goals
major policy changes; and
in both the short and long terms;
Publishing the aggregate State pension
Focusing on long-term (at least five-year)
contribution (from General Funds and
financial projections for revenues and
Other State Funds) as well as pension
expenditures;
contribution benchmarks (e.g., the
Reviewing all funds under the control of Normal Cost plus Interest payment) so
the State during budget negotiations that stakeholders can evaluate the
(including General Funds, Other State adequacy of the State’s pension
Funds, as well as revenue-sharing with contribution (and how underfunding
local governments); compared to that benchmark will impact
Ensuring that expense forecasts pension liabilities).
accurately and completely reflect the full
expected costs of programs;

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 35


36
II. Eliminate the State’s Structural Budget Deficit and
Unpaid Bills, Establish a Reserve Fund, and Implement a
New Funding Plan to Pay Down the Approximately $130
Billion in Unfunded Liabilities of the State’s Pension Funds

The second element of the Financial Framework is to stabilize State


finances. This includes not only eliminating the structural deficit and
unpaid bills, but also establishing a reserve fund and making progress
on reducing the State’s unfunded pension liabilities.

In our 2017 report, the Task Force adopted a that time, the State should consider rolling back
five-year timeframe for eliminating the the recommended tax increases or evaluate its
structural deficit and unpaid bills, as well as top fiscal priorities and allocate these resources
establishing a reserve fund of $4-5 billion, to the most pressing needs. In particular, the
which was estimated to require $10 billion a State should ensure that it has a balanced
year in spending cuts and/or revenue budget incorporating all funds, education is
increases to achieve. adequately funded, pension contributions are
sufficient, and state services are at an
Since that time, the State has taken action to
appropriate level.
address some of the most immediate financial
problems (e.g., enacting an income tax increase It should be noted that the Financial Framework
and passing a budget with a reduced structural does not specifically address the State’s capital
deficit), but there is still much more to be done needs and budget because funding for capital
in order for the State to reach financial stability. comes primarily from funding sources that are
The structural deficit is much smaller than it not included in the General Funds budget.
was, but it has not been eliminated. The State’s However, the Civic Committee recognizes that
bill backlog has only been partially addressed infrastructure will require significant investment
(through issuing bonds), and Illinois still does in the coming years and that ongoing capital
not have an appropriate reserve fund. In investment is critical to maintaining the State’s
addition, the State needs to create a long-term infrastructure and preserving Illinois’ position as
plan for addressing pension liabilities in a a key transportation hub.
sustainable way.
The Illinois Department of Transportation
In order to address all of these components, estimates that additional revenues of $1.7
the State will now need to identify $8 billion billion each year are needed simply to maintain
a year in spending cuts or revenue increases. existing highway and transit infrastructure.61 In
addition, the Regional Transportation Authority
At the end of five years, some of the goals
(RTA) estimates it will need $38 billion over 10
outlined in this Framework will have been
years to bring the mass transit system in the
achieved, including eliminating the bill backlog
Chicago metropolitan region into a state of
and establishing a reasonable reserve fund. At
good repair.62 However, the State’s history of

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 37


episodic capital plans and reliance on The structural deficit was significantly reduced
unsustainable revenues (such as gaming, liquor when the legislature passed the FY18 budget
taxes, etc.) has not been adequate to support and enacted rate increases for the personal and
the ongoing capital and infrastructure needs of corporate income tax. These increases brought
the State. in roughly $4.7 billion in additional revenue in
FY18,64 but it was not enough to balance the
The State of Illinois needs to make new
FY18 budget. Two other measures provided
investments to maintain and improve our
significant one-time revenues to the general
transportation network and spur economic
funds: proceeds from bonds that were sold to
growth. Any revenues identified for
pay down the bill backlog (approximately $2.5
transportation should be sustainable, user-fee
billion) and an increase in federal match
based, able to support all modes of
revenues from using those bond proceeds to
transportation, and, importantly, invested
pay prior year Medicaid bills ($1.2 billion).65
transparently and efficiently based on data.
The enacted FY19 budget was “balanced”
Eliminate the Structural Budget Deficit through the use of one-time revenue sources,
and Unpaid Bills pre-booking savings that have not yet
materialized, and under-appropriating costs
Despite a balanced budget amendment, the
that are likely to occur during the fiscal year.66
State has passed budgets with significant
However, as noted in State bond disclosure
structural deficits for many years. At the time
documents and the recently released five-year
Bringing Illinois Back was published, baseline
projections from the GOMB, the structural
budget projections (that is, what the State’s
deficit for FY19 is more than $1 billion. 67
budget was projected to be absent any major
policy changes) showed structural deficits of As indicated in the chart below, the GOMB
roughly $7 billion a year from FY18-FY22.63 projects structural deficits as much as $3.4
billion over the next five years.

Table 1: Baseline General Funds Budget ($ Millions)68

Source: Governor’s Office of Management and Budget, “General Funds Financial Walk Down FY19-FY24.”

38
The projected structural deficits are higher However, as noted above, eliminating the
than the GOMB previously predicted (the five- structural budget deficit is not the only
year projections released in October 2017 financial pressure facing the State. After years
estimated deficits peaking at roughly $1.5 of running budget deficits (and two years of
billion)69 for a few key reasons. First, the new not having a budget in place), the State
projections build the probability of a accumulated a bill backlog totaling $16.7
recession into their revenue estimates. As billion.72 After the State sold bonds and used
described in the Illinois Economic and Fiscal the proceeds to pay down some of these
Policy Report accompanying the General overdue bills, the backlog was substantially
Funds projections, the GOMB selected a reduced. The GOMB estimates that by the end
pessimistic economic scenario to underlie of the fiscal year it will stand at roughly $7.8
revenue projections due to their view that a billion.73
recession is likely to occur in the next few
If the remaining unpaid bills are amortized
years. As a result, key State source revenues
over the next five years, the State will need to
such as the personal income tax are expected
identify an additional $1.5 billion each year.
to grow slowly in the near term (FY20 and
FY21) and grow more quickly thereafter.70
Establish a Reserve Fund
Second, the new projections include a more
Another key step for the State to take in order
complete and realistic accounting of General
to stabilize its finances is to establish a
Funds expenditures and revenues. For
reserve fund. Having a reasonable reserve
example, the new projections remove
fund would cushion against future budgetary
proceeds from the sale of the Thompson
shocks or fluctuations and make it easier for
Center from the FY19 revenue estimate and
the State to weather economic downturns. It
reduce the amount of interfund borrowing
is a best practice for states to have a reserve
from $800 million to $400 million. In addition,
fund, and credit rating agencies take them
costs that were not included in the enacted
into account when assessing a state’s credit
FY19 budget that will surface in FY19 and
worthiness.
beyond (e.g., debt service for bonds used to
finance the pension buyout programs and For the State to create a $4-5 billion reserve
American Federation of State, County and fund (large enough to cover 8% of State
Municipal Employees (AFSCME) step increases revenues), the State would need an additional
that the State will be required to pay) are $1 billion a year over the next five years in
reflected in the five-year projections.71 either spending cuts or revenue increases.

Given these revenue projections, the State will


have to identify as much as $3.4 billion in
spending cuts or revenue increases each year
over the next five years just to cover the
structural deficit.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 39


Address the State’s Unfunded Pension Increase pension contributions up front
Liabilities so that contributions reach the “tread
water” level faster than under the current
The last major step the State needs to take to schedule; and
get back on the path to fiscal stability is to
Provide a plan to amortize the remaining
address its unfunded pension liabilities. The
unfunded liability after the funds reach
Civic Committee recommends adopting a new
90% funded.
pension funding plan that meet the following
criteria: The plan is discussed in greater detail in the
“Pension Reform” section, and it will require
Structure contributions in a budget an additional $2 billion a year until the
sustainable manner (e.g., will not pension systems are 90% funded.
significantly worsen crowding out);

Summary of the Gap


In order for the State to eliminate the structural deficit and unpaid bills, establish a reserve fund,
and implement the new pension funding plan, it will require approximately $8 billion a year of
additional operating profit for the State over the next five years.

Table 2: Summary of the Gap ($ Millions)

PROJECTED PROJECTED PROJECTED PROJECTED PROJECTED


FISCAL YEAR
2020 2021 2022 2023 2024

$2,763 $3,434 $3,276 $3,199 $3,275

Pay Down the


$1,500 $1,500 $1,500 $1,500 $1,500
Bill Backlog

Establish a
$1,000 $1,000 $1,000 $1,000 $1,000
Reserve Fund

Incremental
Pension $2,000 $2,000 $2,000 $2,000 $2,000
Funding

TOTAL GAP $7,263 $7,934 $7,776 $7,699 $7,775

40
Figure A below shows several policy options that could be implemented to reach this goal.

Figure A: Elements of a Solution

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 41


Pension Reform Illinois’ Statutory Pension Contribution
Schedule
The challenges facing Illinois’ public pension
systems – massive unfunded liabilities, The State makes pension contributions
extremely low funded ratios, and annual according to a schedule enacted in 1995. After
contributions that are crowding out other an initial 15 year phase-in period that has
State spending – are significant and well since ended, the law required that the State’s
known. Across all five pension systems, pension contributions be made at a level
unfunded liabilities total roughly $130 billion, percent of payroll until 90% funding is
and the funded ratio is only 40%. In addition, achieved in 2045. The structure of the
pension contributions currently account for contribution schedule is such that
nearly 20% of the General Funds budget, a contributions started out lower and will
share that will almost certainly increase as the increase each year until 2045, effectively
State’s statutorily required pension deferring amortization of the unfunded
contributions continue to grow over the next liability to the future. Since the schedule
26 years. delays amortization of the unfunded liability,
contributions are currently too low to keep
It is clear that the State needs to make
the unfunded liability from growing (the
changes to its public pensions, but options to
unfunded liability is projected to increase at
reduce the unfunded liability are limited due
the end of FY19; it is expected to grow until it
to the Illinois Supreme Court’s 2015 decision
peaks at approximately $144 billion at the end
on pension reform. Accordingly, future
of FY28).
reforms should focus on creating a credible
plan for paying down the unfunded liabilities In order to keep unfunded liabilities from
of Illinois’ pension systems, while also growing, contributions would need to equal
mitigating the negative impact of pension the “Normal Cost plus Interest,” or the cost of
contributions on the provision of government benefits earned in a given year plus the
services. “interest” on any unfunded liabilities (the
plan’s discount rate times the unfunded
This analysis will describe several options for
liability).74 If the State does not cover the
addressing the State’s pensions, including
”Normal Cost plus Interest” with its annual
reforms to reduce the unfunded liabilities,
contribution, the unpaid interest is then
options to pay down the existing unfunded
added to the total unfunded liability. Since the
liabilities, and the evaluation and
statutory contribution schedule was enacted
implementation of possible changes to
in 1995, over 20 years ago, the State’s pension
pension governance. Given the current level
payments have not been sufficient to keep
of unfunded liabilities and the level to which
unfunded liabilities from growing and are
pension payments are crowding out critical
responsible for roughly $48 billion of the total
services in the State budget, policymakers
increase in unfunded liabilities from FY96-
should implement a responsible, long-term
FY17.75
solution that begins to pay down the
unfunded liability faster than the current However, the State needs to do more than
contribution schedule and structures just keep the unfunded liability from growing;
payments in a more sustainable manner. it needs to make payments to amortize the
approximately $130 billion in unfunded

42
liabilities. There are accounting standards for Yet, despite the astronomical contributions
disclosing the contribution necessary to cover scheduled for the end of the pension schedule,
normal costs plus a payment to amortize the State’s existing plan will never fully
unfunded liabilities over a certain time frame amortize the unfunded liabilities of the
(the “Actuarially Determined Contribution” or pension systems. The pension funding
ADC),76 but Illinois’ statutory contributions are schedule aims for 90% funding rather than
much lower than the ADCs calculated by the 100%, and while 90% funded is considered
State’s pension systems. If the State’s healthy for a pension system, there will still be
contributions equaled the ADC (as calculated unfunded liabilities the State must eventually
and reported by each of the pension systems), pay. The longer the State delays in paying off
it would have required an additional $4 billion the remaining unfunded liabilities, the more
contribution from the State for FY19.77 expensive it will be to do so as the interest on
the unfunded liabilities grows. The State
Since the State’s contributions have been
should amortize all of its unfunded liabilities so
actuarially insufficient to date, pension
that it will only have to pay the normal cost of
contributions in the final years of the
pensions going forward.
contribution schedule will be much higher as a
result. Back-loading pension contributions in Previous Pension Reform Efforts
this manner will make it increasingly difficult
for the State to make its required contributions In May 2015, the Illinois Supreme Court ruled
and still provide necessary government that the pension reform bill passed in 2013 to
services, as it increases the likelihood of address the State’s pension problems (Public
pension contributions growing at a faster rate Act 98-0599) was unconstitutional. The
than the State budget. Even the current provisions of the bill included capping the 3%
contribution level ($7.5 billion from the General automatic compounded benefit increases,
Funds in FY19)78 is crowding out State increasing retirement ages, and limiting the
spending, accounting for nearly 20% of all final average pay used to calculate pension
General Funds expenditures.79 benefits. The Illinois Supreme Court ruled
unanimously that the law violated the pension
Under the current schedule, required pension protection clause of the Illinois Constitution,
contributions are projected to grow at a which states that pension benefits cannot be
compound annual growth rate of “diminished or impaired.” In addition, the court
approximately 3.3% a year until 204580 (with stated that benefits that are promised to
the final contribution projected to peak at employees on their first day of work cannot
$19.5 billion), which is faster than the likely later be reduced during the term of their
growth of the rest of the State budget over that employment, only increased. This decision
same time frame. As such, pension severely limits potential reforms to pension
contributions will become a larger percentage benefits and suggests that only reforms to
of the State budget, crowding out will worsen, benefits for new employees or reforms that
and it will be increasingly difficult for the State allow for voluntary changes will pass
to make its required pension contributions and constitutional muster.
still maintain essential services.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 43


The State already has enacted new employee 3% Automatic Annual Increase buyout
benefit reforms with the establishment of the o Retiring Tier 1 members could
Tier 2 pension system, which requires a higher choose to keep their
retirement age, a change in the calculation of automatic increases at 3% a
final average salary, a cap on pensionable year, or they could accept a
earnings, and a reduction in the automatic cost lower 1.5% annual increase in
of living adjustment. exchange for a lump sum
payment of 70% of the
The State also authorized an optional Tier 3 difference between what they
plan in its FY18 budget, which would allow new would have gotten with 3%
employees to opt-in to a hybrid pension plan increases and what they will
with a defined benefit and defined contribution now get with 1.5% increases.
component (similar to a 401(k) plan). After the
However, since the savings from the buyout
new Tier 3 plan is enacted, the responsibility
programs rely on people opting in, the
for paying the cost of pensions going forward
ultimate projected savings is not clear. In
will fall on local employers rather than the
addition, projections do not take into account
State (except for existing Tier 1 and Tier 2
the cost of issuing bonds to pay for the
employees).81 The State would see some
buyout programs, so the savings would be
savings eventually from the Tier 3 plan
reduced. Recent projections from the GOMB
requiring local employers to pay the cost of
show that the cost of debt service for issuing
pensions, but it is unclear how much money it
bonds to pay for the buyout will cost the State
will save or when those savings will materialize
nearly $100 million a year from FY20-FY24.84
(estimates are further complicated due to the
pension-related provisions in the new Opportunities for Future Reforms
Evidence-Based School Funding Formula). It is
estimated that the pension plans will not be With the Illinois Supreme Court ruling that
able to enact Tier 3 until FY20 at the earliest.82 benefits cannot be changed for current
employees and the less expensive Tier 2
There have also been a number of smaller system already in place for all new employees,
scale pension reforms that have been enacted. there are not many options left for pension
Most recently in the FY19 Budget reform that would produce significant savings
Implementation Act (BIMP), the State (particularly because 70% of liabilities are
authorized buyout programs that could save attributable to current retirees).85 The
the State approximately $400 million (although potential reform options described below will
no actuarial analysis of either program was first focus on reform options to reduce the
released prior to the savings being taken in the unfunded liability, then on creating a credible
FY19 budget). The buyout programs consist of plan to pay down the unfunded liability. In
two pieces: addition, we will discuss reform options for
pension plan governance, as well as options
Tier 1 buyout for vested, inactive
members83 for addressing the unfunded liabilities of local
pension plans.
o The State would offer inactive
members with vested benefits
60% of the net present value
of their pensions.

44
Reforms to Reduce the Unfunded Liability amendment is frequently brought up as the
solution that will solve the State’s pension
One reform that is often discussed is the
problems since it would allow the State to
“consideration model” proposed by Senate
reduce the benefits it is obligated to pay out.
President Cullerton. This model would ask
However, passing a constitutional
Tier 1 employees to choose between having
amendment is a difficult process: the
their future pay increases included in the
amendment must pass with a three-fifths
calculation of their pension benefits or
majority in both the House and Senate before
maintaining the automatic 3% compounded
it is voted on by residents in the next general
cost of living adjustment. However, as many
election, where either three-fifths of those
have noted, there is no guarantee that this
voting on the amendment or a majority of
plan would survive a constitutional challenge
those voting in the general election must vote
since it may be interpreted as asking Tier 1
to approve it.87
employees to choose between two forms of
benefit diminishment. Proponents argue that Depending on what form the amendment
this model will survive a constitutional took, the State could be empowered to make
challenge since future pay increases are not benefit changes for Tier 1 members, including
guaranteed. current employees and retirees. The majority
of the current liability for the State’s pension
Some also have proposed a type of pension
plans is attributable to current retirees ($148
reform that has been successfully
billion of $212 billion or 70%, of total liabilities
implemented in the private sector, a “hard
for the three largest plans).88
freeze.” A hard freeze would end benefit
accruals for active employees in the pension
Options for Paying Down Pension Liabilities
plans, which would eliminate future normal
costs and reduce the current liability for active Given the limited options for reducing the
employees (this is the equivalent of unfunded liability without a constitutional
terminating all workers and workers would amendment and the time it would take to
only get what is earned to date). The pass an amendment and implement it should
reduction in current liability would be the it pass, the State should immediately focus on
result of eliminating future pay increases from instituting a credible plan for paying down the
the calculation of accrued pension benefits; unfunded liability. Several options for how the
pension benefits would instead be based on State might address its pension liabilities and
current pay. However, since the majority of their pros and cons are listed below.
the State’s pension liabilities (70%) are
It should be noted that projections for all
attributable to members who are already
scenarios only include the “big three” plans
retired, a hard freeze would only reduce the
(TRS, SERS, and SURS). They presume future
unfunded liability by an estimated $9 billion.86
experience will match assumptions
It is also likely that a hard freeze would be
embedded in these projections, including
challenged pursuant to the Illinois
meeting the assumed asset returns (7.00% for
Constitution’s pension protection clause.
TRS and SERS, 7.25% for SURS). Real dollar
Finally, another potential reform is a contributions are discounted using a growth
constitutional amendment to the pension rate of 2.5% per year. Contribution estimates
protection clause. Passing a constitutional

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 45


are for the entire State contribution, not just pushing off an even heavier future price. It
the portion paid out of the General Funds. also contributes to Illinois having one of the
worst-funded pension systems in the country,
Status Quo: Following the Statutory Pension behind only Kentucky and New Jersey.90
Schedule
Addressing the State’s Pensions Through
The first option is to continue to follow the
Supplemental Contributions
statutory pension contribution schedule. One
positive aspect of the statutory schedule is The second option the State could pursue to
that it clearly lays out a plan for reaching 90% fund its pensions is to make supplemental
funding by 2045. If the State makes pension contributions on top of what is
contributions as scheduled (and all other required by statute. Putting additional money
assumptions are met), the State will meet this towards pensions immediately would speed
goal. up the timeline for reaching key funding
benchmarks – including the “tread water” level
However, in our view, the Status Quo funding
and the State’s own goal of 90% funded –
schedule does not represent a credible plan
thereby removing a key roadblock to fiscal
for paying down the State’s unfunded
stability sooner. In addition, putting more
liabilities. The current pension contribution
money towards pensions now would likely
schedule was set up in a way that shifted
reduce the total amount of interest the State
costs to the future and despite contributions
would have to pay on the unfunded liability in
already consuming a significant amount of the
the long run.91
general funds budget (roughly 20% for FY19),
the statutorily required contribution will be It is important to note that in order for these
more than double its current level in nominal payments to accelerate the timeline for
dollars by the final year of the schedule ($19.5 reaching 90%, they would need to be kept in a
billion or approximately $10 billion in 2018 separate fund. Due to the structure of the
dollars). Unless the State’s budget (specifically current funding schedule, making additional
revenue) grows at the same rate or more, it contributions to the pension funds directly
will become increasingly difficult to make the would lead to a decrease in required
statutorily required pension contributions contributions in future years.92 Alternatively,
without severely cutting services, significantly the State could take a potentially simpler
raising taxes, or some combination of both. approach and amend the funding law so that
any supplemental contributions would not
In addition, through the first 24 years of the
change the rest of the contribution schedule.
statutory contribution schedule (i.e., FY96-
FY19), contributions have not been sufficient The main argument in favor of making
to keep the unfunded liability from growing. supplemental pension contributions is that it
As such, the State has essentially dug itself helps get the State to a “tread water” level
deeper throughout the life of the pension much faster than under the current pension
payment schedule and due to its structure, schedule (contributions are not currently
will continue to do so for another 10 years.89 projected to reach “tread water” levels for
The State’s “plan” for paying down the approximately 10 years), and it significantly
unfunded liabilities of the pension funds accelerates the timeline for reaching 90%
actually makes the problem worse while funded.

46
A Civic Committee analysis of the three major The potential reduction in the State’s total
pension systems (TRS, SERS, SURS)93 suggests pension contributions from making
that an additional $2 billion a year made as a supplemental payments until it gets to 90%
supplemental contribution would get the funded is enormous. If the State follows its
State’s contributions above the level current pension schedule, its projected
necessary to tread water quickly (unfunded contributions in inflation-adjusted dollars will
liabilities would peak at the end of FY20). It total roughly $263 billion; with $4 billion in
would also reduce the projected time it takes supplemental contributions, the State’s total
to reach 90% funded by six years. If the State contribution will be approximately $40 billion
made $4 billion supplemental contributions, it less, totaling approximately $224 billion.
would exceed the tread water payment level Supplemental contributions of $2 billion
immediately and would reduce the projected would reduce the State’s total contribution by
timeline for reaching 90% funded by 11 years. approximately $25 billion to approximately
With supplemental pension contributions of $238 billion.95
$2 billion a year, the pension funds are
The challenge with making supplemental
projected to reach 90% funded by 2039; with
contributions, of course, is finding the money
$4 billion supplemental contributions, the
to pay for them, especially since required
funds are projected to reach 90% by 2034.94
contributions will be increasing steadily over
When discussing potential changes to the the life of the pension payment schedule.
State’s pension schedule, it is useful to Crowding out is already an issue at the
compare how much money the State will have current contribution level; it would be difficult
to put towards pension contributions under to make supplemental contributions without
each scenario (the “total contribution”). Since additional sacrifice, whether through cutting
the funding scenarios discussed throughout services, raising taxes, or both.
this analysis have different funding targets
(e.g., 90% vs. 100%) and different target years Extend the Pension Contribution Schedule
to reach those funding goals, we define the The third option for addressing pension
total contribution as the sum of State pension funding is to extend the current pension
contributions from FY20 until FY65. schedule beyond 2045 while keeping the
If the State’s goal is to reach 90% funded, underlying funding mechanism in place.
there will still be an unfunded liability that the Extending the pension schedule would give
State must pay interest on going forward; any the State more time to pay down the
State contributions after reaching 90% funded unfunded liabilities, allowing it to reduce
must equal the Normal Cost plus Interest to yearly contribution levels and alleviate further
remain at 90%. By contrast, if the State crowding out in the near term. However,
changed its funding target to 100%, any extending the schedule and taking more time
contributions after reaching 100% would not to reach 90% funding significantly increases
include interest since there would no longer the State’s total pension contribution in the
be any unfunded liability. The difference in long run, exposes the funds to greater risk
post-funding target contributions can be during market downturns, and would make it
significant, and therefore, should be taken so the State’s unfunded liability is higher in all
into account when evaluating the total costs years than it would be under the current
borne by the State under each scenario. schedule.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 47


Analysis of the three largest pension systems the State’s bond rating is the lowest in the
shows that if the State extended its pension nation and one level above junk, any new plan
schedule by 10 years to 2055 (keeping the should be credible, achievable, and
90% funded target), the total pension demonstrate that the State is making
contribution for FY20 would decrease by progress on funding its pensions. As such, we
roughly $1.3 billion. Extending the schedule have identified criteria which we believe
by 20 years to 2065 and keeping the 90% should be met by any new pension funding
target would reduce the required FY20 plan. It should:
contribution by roughly $2 billion. In the near
Structure contributions in a budget
term, the State would benefit from the
sustainable manner (i.e., will not
reduction in required contributions, as it
significantly worsen crowding out);
would free up some money in the short term
to spend on government services rather than Increase pension contributions up front
on legacy debt. so that contributions reach the “tread
water” level faster than under the current
However, the reductions in required schedule; and
contributions do not represent “savings” in Provide a plan to amortize the remaining
any way – the unfunded liability would unfunded liability after the funds reach
increase as a result of lower contributions, 90% funded.
and the interest that accrues on those
liabilities eventually must be paid off. Delaying “2+2” Plan
the timeline for amortizing the unfunded
We have identified a funding plan that meets
liability significantly increases the total
these criteria by blending attributes from the
contributions the State must make until it
different funding options described thus far.
reaches 90% funded. Extending the schedule
Broadly, this funding scenario would set a
to 2055 (while also targeting 90%) would
new yearly contribution schedule (the
increase the State’s total contributions by
“baseline contributions”) with a lower growth
approximately $42 billion to $305 billion (in
rate so that contributions are more budget
2018 dollars); extending the schedule to 2065
sustainable than the current schedule. In
(while also targeting 90%) would increase the
addition, it would require fixed supplemental
State’s total contribution by $91 billion to
$2 billion contributions (“supplemental
$354 billion (in 2018 dollars).96
contributions”) each year (in nominal dollars)
until the pension funds reach 90% funding,
Restructure the Pension Contribution Schedule
which puts more money into the funds up
A final option for the State is to restructure front and gets the State to a “tread water”
the statutory pension contribution schedule. level faster than the current contribution
However, given the State’s history of schedule. Lastly, this plan provides a path to
underfunding its pensions, any plan that only full funding – targeting a 100% funded ratio by
extends the time frame for reaching its amortizing the remaining unfunded liability
funding target (e.g., keeping the same funding over 10 additional years (i.e., after the plans
mechanism but giving the State more time to reach 90% funded, which the current
meet the funding target) is likely to be met contribution schedule does not do).
with criticism from bond rating agencies,
investors, and the general public. Given that

48
Similar to the supplemental contribution baseline contributions would grow at 2% each
options described earlier (the $2 billion or $4 year (compared to an average 3.3% each year
billion on top of the current contribution under the current schedule). In this schedule,
schedule), the main challenge with this the FY20 payment would be set to be 2%
scenario is identifying the additional $2 billion higher than the FY19 payment, which would
to contribute to the pension plans each year. continue until the plans are 90% funded. In
However, the baseline contribution for FY20 addition to this regular payment, the State
under the “2+2” Plan will be roughly $500 would make supplemental $2 billion
million less than the projected FY20 contributions each year until the pension
contribution under the Status Quo. Therefore, funds reached 90% funded. Once the pension
an additional $2 billion a year in nominal plans reach the 90% funded target, the “2+2”
dollars should be more manageable. Several Plan provides for the amortization of the
policy options that could produce the remaining unfunded liabilities. The remaining
required $2 billion a year are described liability would be paid down over 10 years,
throughout this report. and the pension plans would reach 100%
funded by 2055.
This proposal would restructure the
contribution schedule so that the State’s

Figure B: Yearly Pension Contribution Comparison: Status Quo Contribution Schedule vs. the
“2+2” Plan

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 49


Figure B shows a comparison of pension that yearly contributions under the “2+2” Plan
contributions in nominal dollars under the are lower than the Status Quo in FY33 and
status quo (current pension schedule) and the beyond make the “2+2” Plan a more budget-
“2+2” Plan. (The bars for the “2+2” Plan sustainable option in the long term.
represent the baseline contribution levels; the
The benefits of increasing contributions up
line for the “2+2” Plan represents the yearly
front are shown in Figure C below. Not only
baseline contribution level plus the
are the State’s pension funds projected to
supplemental $2 billion contribution.)
reach the “tread water” level faster, but under
As shown in Figure B, yearly pension the “2+2” Plan, the unfunded liability is
contributions for the “2+2” Plan are initially projected to peak at a lower level than under
higher than the yearly contributions under the the Status Quo pension schedule. It would
Status Quo. As such, the State’s contribution is remain lower than the projected unfunded
projected to reach the level necessary to tread liability for the Status Quo pension schedule
water a full five years sooner under the “2+2” for all years.
Plan than under the Status Quo contribution
schedule (FY23 vs. FY28). In addition, the fact

Figure C: Unfunded Liability Comparison, Status Quo Contribution Schedule vs. “2+2” Plan

50
In addition to comparing the cost of the to reach approximately 90% funded), FY46-
State’s yearly pension contributions and FY55 (when the Status Quo scenario
unfunded liabilities, it is important to analyze maintains 90% funded and the “2+2” Plan
how altering yearly contributions will affect amortizes the remaining unfunded liability),
the total cost of the State’s pension and FY56-FY65 (when the Status Quo is still
contributions over time. Table 3 below shows maintaining 90% and the “2+2” Plan has no
a comparison of the total cost of the State’s remaining unfunded liability).
pension contributions for three time frames:
FY20-FY45 (when both scenarios are projected

Table 3: Comparison of Total State Contributions and Unfunded Liability, Status Quo vs. the “2+2”
Plan ($ Billions).

Note: Forecasts presume all assumptions as of June 30, 2017 will be realized, including asset return assumptions of 7.00%
(TRS and SERS) or 7.25% (SURS). Real dollar totals are based on a 2.5% inflation assumption.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 51


As Table 3 illustrates, there are benefits to Contributions would be lower than under
restructuring the contribution schedule so that the Status Quo (and the “2+2” Plan), making
the full unfunded liability is amortized, and them more budget sustainable;
more money goes into the pension systems up The State would reach the contribution level
front: necessary to tread water one year faster
than under the Status Quo (FY27 vs. FY28);
The “2+2” Plan would get the State to better
and
than 90% funded by 2045 (the target under
the Status Quo) for approximately $6 billion The unfunded liability would be fully
less in total State contributions. amortized, with the pension plans reaching
100% funded in FY62.
While amortizing the remaining unfunded
liability (“2+2” Plan) would cost the State However, making adjustments such as slowing
more than maintaining a 90% funded ratio the growth rate for baseline contributions
from FY46-FY55 (Status Quo), the projected changes the projected timeline and cost for
savings compared to the Status Quo after reaching key funding goals compared to the
the “2+2” Plan has eliminated all unfunded “2+2” Plan. For example, slowing the baseline
liability (FY56-FY65) is approximately $7 contribution growth rate to 1% instead of 2%
billion. would delay the time frame for reaching 90%
The total financial benefit to the State would funded by approximately eight years (the “2+2”
be approximately $46 billion: total Plan would reach 93% funded by FY2045, vs.
contributions from FY20-FY65 would be 90% funded by FY2053 with 1% baseline
approximately $8.6 billion less compared to contribution growth) and would add
the Status Quo, as well as the elimination of approximately $24 billion to the total cost of
the $37.7 billion in projected unfunded liability
State contributions from FY20-FY65 (total
in FY65 under the Status Quo.
contributions under the “2+2” Plan would total
The “2+2” Plan meets the three criteria we have approximately $255 billion compared to
identified as necessary for any new pension approximately $279 billion if baseline
plan: contributions are structured in a more contributions grew at 1% a year).
budget sustainable manner, payments are
The State could also consider pension
increased up front so that the State gets to
contribution schedules that flatten out yearly
tread water faster than the current schedule,
and the proposal provides a plan to amortize contributions so they don’t go above a certain
level or would gradually phase contributions
the full unfunded liability. In addition to meeting
these criteria, the “2+2” Plan also provides a down to avoid a “cliff” where payments drop
substantially after a funding target is met. No
likely reduction in the total State contribution to
the pension systems over the next 46 years, matter how the State decides to restructure its
saving a projected $8.6 billion. pension ramp, it is critical that the State focuses
on options that put more money in up front (in
Adjusting some of the levers of this plan, order to begin reducing unfunded liabilities
particularly the growth rate for baseline sooner than the Status Quo schedule) and
contributions, could give the State more options adhere to the other key principles (budget
for a pension funding plan that would still meet sustainability and fully amortizing the unfunded
the three criteria we have outlined. For liability) we have identified.
example, if the baseline contribution growth
rate were 1% instead of 2%:

52
Governance of Pension Funds The Center for Municipal Finance at the
University of Chicago has identified the
A third area of reform that the State should
relationship between pension fund
pursue is evaluating the governance of State
governance and investment returns and
and local pension funds and making
funding ratios as an important topic ripe for
improvements to governance where evidence
academic research and plans to study the
indicates it is necessary.
issue further. We support ongoing efforts to
State and local pension funds are not subject ascertain the link between good governance
to the strict requirements of the Employee and strong pension results and to implement
Retirement Income Security Act (ERISA) to changes accordingly.
which private pensions must adhere, and
research shows that most pension funds do Local Government Pension Liabilities
not voluntarily follow many best practices in Illinois’ pension troubles are not limited to the
pension fund governance. There is some State pension funds as local government
evidence that pension plans that do employ pension funds (e.g., local police and fire
best practices in transparency (reporting pensions) face significant challenges as well.
financial, actuarial, statistical, and investment One high-profile example is the City of
information) are shown to be more likely to Harvey, which had State funds withheld and
have higher investment returns.97 diverted to its pension funds by the
Conversely, poor governance produces lower Comptroller earlier this year due to its failure
investment results and lower levels of plan to make required pension payments. Yet,
funding. For example, one study Harvey is not alone in its pension challenges.
demonstrated that the presence of plan An analysis of the more than 600 police and
participants, either active or retired, on a fire pension funds across the State show that
pension fund board is correlated with lower most police and fire pension funds are
levels of pension plan funding.98 Furthermore, underfunded, with an average 60% funded
many plans have significant leeway to employ ratio. However, approximately 29% of these
practices that intuitively suggest lower funds had a funded ratio less than 50%, and
investment returns and funding ratios will only 9% of the funds had a funded ratio above
result. For example, plans are allowed to 80%.100
choose investments that offer “collateral Some argue that local governments do not
benefits” (e.g., promoting local economic have the capacity to deal with underfunded
activity or avoiding undesirable investments pensions on their own since property taxes in
like tobacco, firearms, etc.) regardless of some jurisdictions are high and already going
whether they are sound investments on their mostly toward pensions. (For example,
other merits. Some plans are also not approximately 69% of property tax revenues
required to use reasonable actuarial factors in in the City of Galesburg are projected to go
critical plan calculations.99 towards pensions in FY19.101) Rather than
leave local funds to fend for themselves, some
have called for the State to take on the
responsibility for the unfunded liabilities and

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 53


governance of the local pension funds. If the municipality declared bankruptcy. (Note: while
State took on the unfunded liabilities of all the municipalities are currently prohibited from
pension funds in the State (e.g. the local declaring bankruptcy under Illinois law, the
police and fire plans, the City of Chicago plans, State could change the law to authorize
the Cook County plan, and the Illinois municipal bankruptcy. States, however, are
Municipal Retirement System) it would
not permitted to declare bankruptcy.)
increase the unfunded liabilities by
approximately $60 billion,102 bringing the The issue of the State potentially assuming
unfunded liability to approximately $190 unfunded liabilities for local pension funds is
billion. complex and merits further study. Before any
decision is made on absorbing the unfunded
However, taking on the unfunded liabilities for
liabilities of local pension funds, a
all local pension funds has complexities that
comprehensive actuarial analysis should be
should be considered. First, there is an issue
performed, and a thorough study of
of fairness – should taxpayers statewide have
governance changes that would be needed at
to pay to fund pensions in other localities
the state and local levels should be
whose underfunding may be due to financial
undertaken.
mismanagement? Second, if the State
assumed local pension liabilities, it would
preclude the possibility of those liabilities
being restructured or discharged if the

54
III. Scrutinize the Entire State Budget for Spending
Reductions
In order to achieve the required additional $8 billion each year to get
the State back on sound financial footing, there will need to be
expenditure reductions in addition to new revenues.

A closer evaluation of the General Funds Tier 1 buyout for vested, inactive
budget suggests that additional savings members:
opportunities may be limited. Many of the o The State would offer inactive
savings proposed by the Governor’s Office members with vested benefits
and/or the General Assembly in the past are 60% of the net present value of
based on very optimistic assumptions and their pensions
often do not materialize as expected. It is
o Estimated savings are roughly $40
clear that there needs to be a comprehensive million
assessment of all State expenditures
3% Automatic Annual Increase buyout:
(including the General Funds and Other State
Funds) to identify areas where additional o Retiring Tier 1 members could
savings can be achieved, either through cuts choose to keep their automatic
or reorganizing. increases at 3% a year, or they
could accept a lower 1.5% annual
Savings in the Enacted FY19 Budget increase in exchange for a lump
sum payment of 70% of the
The enacted FY19 budget appears balanced at difference between what they
first glance, but it relies on one-time revenues would have gotten with 3%
(including $800 million from interfund increases and what they will now
borrowing and $300 million from the sale of get with 1.5% increases
the Thompson Center) and counts savings o Estimated savings are $382 million
that have not yet materialized. Proposed
pension reforms are an area in which the Reduction of the “spiking cap” from 6% to
3%:
State frequently assumes savings in the
budget before those savings have actually o Requires local employers to pick
materialized. Higher education is one area of up the increased cost of pensions
the budget where there have been significant if they are due to a salary increase
cuts in recent years, including in the FY19 of more than 3% at the end of an
employee’s career
budget.
o Estimated savings are $22 million
Pension Reforms
There are several reasons the State should
The FY19 budget assumed roughly $400 not count savings from these pension reforms
million in savings from pension reforms. immediately.
Provisions include:103

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 55


First, regarding the buyout provisions, Potential Areas of Future Savings
although it is reasonable to assume that some
After years of budget issues, it appears that
members of the pension systems will find this
the State has utilized many sources of General
option attractive and will choose to Funds savings; however, our analysis indicates
participate, the fact remains that savings that the State Employee Group Insurance
hinge entirely on how many people opt in. Program (SEGIP) is one area for significant
The State assumed participation based on a General Funds savings. We also continue to
similar program in Missouri and projected believe that the State should conduct a
Illinois’ savings using the same 22% take-up comprehensive analysis of both General
rate Missouri initially saw.104 It is likely that the Funds and Other State Funds to determine
State will achieve some savings if and when what savings might exist in funds that typically
the programs are implemented, but the State are not scrutinized during the budget process.
cannot guarantee that they will be to the level Additionally, the State should continue to
pursue local government consolidation
of what is assumed in the enacted FY19
measures in order to reduce the cost of
budget.105
government and achieve savings through
An additional concern with counting pension more efficient governance, which could in
buyout savings now is that the timing of turn reduce the yearly cost of State transfers
implementation is such that a significant to local governments and would benefit State
portion of savings will not occur immediately. taxpayers by reducing their local tax burden.
First, the State will need to issue bonds to pay
for the buyout, the timing of which has not General Funds Savings: State Employees’
been determined. Additionally, as described Group Insurance Program (SEGIP)
in the FY19 Budget Implementation Act
The State Employees’ Group Insurance
(“BIMP”), which authorized the pension
Program (SEGIP) provides medical, dental,
buyout programs, members may opt into the
vision, and life insurance coverage to the
buyout programs until June 30, 2021. Given
following (and their dependents):
the nearly three-year window of time over
which the buyout program could take place, it Active State employees;
does not make sense to count all of the Elected State officials (legislators and
savings from the programs upfront. judges); and
Lastly, even if all assumptions are met and the State university employees.
timing works such that these reforms produce
SEGIP also provides retiree healthcare
savings in FY19, there will be costs associated benefits for members of the State’s five
with these buyout programs that are not pension plans (and their dependents) EXCEPT:
included. Future debt service on the bonds
Teachers who receive benefits through
used to pay for the buyouts (and the costs
the Teachers’ Retirement Insurance
associated with issuing those bonds) will
Program (TRIP); and
reduce the net savings to the State.
Community college workers who receive
benefits through the College Insurance
Program (CIP).

56
SEGIP participants have their choice of costs, whether by higher premiums or higher
medical plans, including HMOs, Open Access out-of-pocket costs.
Plans (OAPs), and the State’s self-insured plan
Successful implementation of the reforms,
(QCHP). Medicare-eligible retirees and their
which was assumed in the former Governor’s
Medicare-eligible dependents must enroll in
FY19 Proposed Budget, was expected to
Medicare Advantage HMO and PPO plans.
reduce FY19 General Funds expenditures on
In FY18, costs associated with SEGIP totaled group health insurance by about $470 million.
approximately $3.1 billion, including $335 These reform provisions were included in
million in interest payments from overdue contract negotiations with the American
FY16/FY17 bills that were paid in FY18. Federation of State, County and Municipal
Excluding interest payments, total SEGIP costs Employees (AFSCME) union; however, those
were close to $2.8 billion, with medical care negotiations were at a stalemate and the
subject of litigation. (The Governor also
coverage accounting for about 85% of the
requested that the General Assembly change
total ($2.4 billion).106
the statute that requires negotiating health
benefits for public workers through collective
SEGIP and the Previously Proposed FY19
bargaining but was unsuccessful). In addition,
Budget
the FY19 Proposed Budget included a shift of
A package of reforms to the existing medical $105 million in group health insurance costs
plans offered to SEGIP enrollees (excluding for State university workers to the universities
the Medicare Advantage plans have been that employ them.107 That proposed cost shift
proposed to create a multi-tier system of was rejected by the General Assembly.
“metal” plans – Platinum, Gold, Silver, and
Bronze – for the QCHP, HMO, and OAP plans. As a result, the FY19 Enacted Budget does not
The tiers would be defined by a balance include either the “metal” tier reforms or the
between increased premiums and/or cost shift and appropriates $2 billion in
increased out-of-pocket costs (co-payments, General Funds for group health insurance108 –
deductibles, etc.): the FY19 Proposed Budget appropriated only
$1.45 billion.109 We believe healthcare plan
Platinum plans would require significant reforms that align the State’s plans better with
increases to the current employee what is offered in the private sector should be
premium contribution; pursued.
Silver plans would keep the employee
premium contribution at the current level Retiree Healthcare under SEGIP
but have higher out-of-pocket costs;
As described above, the State requires
Gold plans would split the difference Medicare-eligible retirees and their Medicare-
between the Platinum and Silver plans; eligible dependents to enroll in Medicare
and Advantage plans which are offered by private
Bronze plans would have no employee companies that contract with the federal
premium contribution but much higher government to provide Medicare benefits.
out-of-pocket costs.
Each of these plans would increase employee
contributions toward their own healthcare

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 57


This requirement went into effect in FY14; described below, relates to the latter cost
prior to that, Medicare-eligible retirees were category.
offered the same plans as other SEGIP
SEGIP enrollees who retired after January 1,
enrollees.
1998 are subject to a statutory provision that
Retiree healthcare benefits are similar to the State provide a 5% healthcare premium
pension benefits in that future benefits are subsidy for each year of creditable service
earned through current service (i.e., the 5% (i.e., retirees with 20 years of creditable
retiree healthcare premium subsidy that is service receive a 100% premium subsidy).
earned for each year of service). Therefore, SEGIP members who retired before January 1,
similar to the treatment of pension benefits, 1998 are eligible for single coverage at no cost
the State is required to report the present to the member.111
value of future employer-provided retiree
In June of 2012, during the Quinn
healthcare benefits that are attributable to
administration, the State enacted Public Act
previous service – the accrued Other Post-
97-695, which eliminated the statutory
Employment Benefits (OPEB) liability. The
provisions regarding State subsidies of retiree
State does not pre-fund its OPEB liability in
healthcare premiums. Public Act 97-695 gave
the same way that it pre-funds its pension
the Illinois Department of Central
liability; retiree healthcare benefits are funded
Management Services (CMS) the authority to
on a pay-as-you-go basis. As a result, the
determine how much retirees would
unfunded OPEB liability is equal to the
contribute toward their premiums.
accrued OPEB liability.
During the subsequent collective bargaining
The Governmental Accounting Standards
negotiations, the State negotiated new retiree
Board requires that OPEB liabilities be
healthcare provisions with its largest union,
reported and that OPEB programs funded on
AFSCME, which took effect in FY14:112
a pay-as-you go basis (like Illinois) use a
discount rate that is consistent with an index The contract included the requirement
of high-quality 20-year general obligation that, in FY14, Medicare-eligible retirees
bonds. The discount rate used for the State’s contribute 1% of their pension benefit
accrued OPEB liability as of June 30, 2016 was toward their healthcare premium; non
2.85%, and the accrued OPEB liability was Medicare-eligible retirees were required
reported as $42 billion.110 to contribute 2% of their pension benefit
toward their healthcare premium;
Retiree Healthcare Reforms and the Kanerva In FY15, those amounts increased to 2%
Decision and 4%; and

Opportunities for reducing the cost of retiree The contract also included the agreement
healthcare fall into two broad categories – to move Medicare-eligible retirees into
changes to the medical plan(s) offered to Medicare Advantage plans.
retirees and changes to the State’s subsidy of Governor Quinn’s administration estimated
retiree healthcare premiums. The successful that, over the course of the two-year contract,
shift of Medicare-eligible retirees into increasing retiree premiums would generate
Medicare Advantage plans falls into the $128 million in savings, and the switch to
former category while the Kanerva decision, Medicare Advantage would generate savings

58
of $232 million. State retirees challenged the average.115 (As an average, this figure factors in
law in four separate lawsuits that were employees who will not be owed benefits in
consolidated and became known as the retirement, as well as those who will be owed
Kanerva litigation after Roger Kanerva, the benefits, so the value of promised benefits
lead plaintiff in one of the cases.113 owed to each person covered by SEGIP at
retirement is higher than the $70,000 average.)
In July 2014, the Illinois Supreme Court held that
the State’s subsidies toward the cost of retiree These costs are driven in part by the structure
healthcare coverage are subject to of the premium subsidy and the fact that the
constitutional protection, which the legislature State assumes payment for 5% of a retiree’s
may not diminish or impair. As a result of that healthcare premium for every year of service.
ruling, the required increased contributions Recent analysis by the Pew Charitable Trusts
from retirees toward their healthcare premiums demonstrates that the primary driver for
imposed by the Quinn administration no longer variation in OPEB liabilities between states is
applied after September 2014. how they structure their contribution toward
retiree healthcare benefits: 116
For FY19, retired SEGIP enrollees are
projected to pay only 6.3% of their healthcare States that provide a monthly contribution
costs. 114 equal to a flat percentage of the premium
report the largest liabilities and costs that
However, the Supreme Court decision did not automatically increase as plan premiums
impact the shift of Medicare-eligible retirees and increase. Illinois is one of these states;
their Medicare-eligible dependents into
States with fixed-dollar premium
Medicare Advantage plans. Currently, SEGIP
subsidies provide a smaller benefit and
enrollees who become eligible for Medicare report lower liabilities. Their exposure to
(and whose covered dependents are also healthcare cost inflation is also lower
Medicare-eligible) must enroll in a Medicare because a fixed-dollar subsidy does not
Advantage plan if they wish to remain in SEGIP; rise with the plan premiums; and
they are not given the option of remaining in
States that only provide access to a retiree
one of the other SEGIP plans. healthcare plan, with no subsidy, have the
lowest liabilities as a percentage of
Potential Cost Savings: Implement a New personal income. Although these plans do
Retiree Healthcare Plan not make an explicit monthly premium
The Kanerva decision does not apply to new contribution to retirees, many offer
retirees a reduced premium through a
employees. There is no prohibition against
group rate, which is an implicit subsidy.
establishing a new retiree healthcare plan that
would change the retiree healthcare premium In order to limit the future growth in its OPEB
subsidy for future hires. Such a change would liability (and reduce the average $70,000 in
not affect the State’s current OPEB liability promised SEGIP retirement benefits associated
(because the OPEB liability is based on previous with each new hire), Illinois should implement a
service), but would limit its growth in the future. new retiree healthcare plan for future hires as
soon as possible. The plan should move away
Under the current system, the State is taking on
from a fixed percent of premium subsidy and
approximately $70,000 in promised retirement
provide either a fixed-dollar premium subsidy or
healthcare benefits for each new hire, on

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 59


no subsidy but allow continued access to a group had been made in 1997 and 1998 to the
medical plan. premium subsidy for current employees who
had not yet retired. In addition, the inherent
Potential Cost Savings: Remaining Avenues for ambiguity of healthcare compared to pension
Healthcare Benefit Reform in the Context of costs (e.g., pension costs are based on a formula
Kanerva117 and healthcare benefits are frequently
negotiated) suggests that prospective changes to
Although the Kanerva case provides clear
the premium subsidy would not be a
protection of the premium subsidy for current
diminishment of benefits. Such a change might
retirees, it leaves room for the State to change
also generate significant savings for the State.
the healthcare plans that the premium subsidy
supports. The State may also be able to make
Scrutiny of Other State Funds
prospective changes to the premium subsidy for
current employees, but doing so would be One of the major impediments to identifying
difficult to reconcile with other decisions savings in the State budget is that only about
interpreting the pension protection clause. half of the budget is part of budget
negotiations and scrutinized closely each
The State Employees Group Insurance Act gives
year.118 Typically, budget discussions and
the State the power to determine and modify the
negotiations focus on the General Funds;
healthcare plans it offers its employees and
Other State Funds receive little scrutiny by
retirees. It does not, however, spell out the level
comparison.
of benefits that must be included in employee
healthcare plans. This is in contrast to the The narrow focus on the General Funds
premium subsidy, which is a benefit promised in budget can be misleading when analyzing
statute. Accordingly, even though the State total programmatic spending. Key programs,
cannot change the premium subsidy for current such as Medicaid, receive funding from
annuitants, the State has the power to make several sources, including General Funds,
changes to plan design without it being federal funds, and Other State Funds.
considered a “diminishment or impairment” of Therefore, looking only at the General Funds
benefits under the pension protection clause. portion of Medicaid funding will give an
Savings could be achieved through changes to incomplete picture of actual programmatic
healthcare plan design for both current spending; a reduction in General Funds
employees and retirees (subject to collective Medicaid spending could represent an actual
bargaining agreements). cut to the program, or it could merely be a
shift in where funding comes from.
In addition to the creation of a new retiree
healthcare plan that would change the premium In addition, ignoring Other State Funds in
subsidy for new employees, the State should budget debates and negotiations allows some
explore the possibility of making changes to the significant budgetary choices to be made with
premium subsidy that current employees earn. little scrutiny. Some important programmatic
Other cases involving the pension protection areas, such as transportation, get the bulk of
clause have held that an employee’s rights are their funding from sources outside the
governed by the provisions in effect when they General Funds. If the State increased the
entered the system, but statements in the scope of the budget to include All Funds,
Kanerva case emphasized that previous changes there would be increased discussion and

60
scrutiny of spending priorities in these types For many of these local units of government,
of programs. public oversight is difficult due to the sheer
number of governments in a given area (e.g.,
The Fiscal Futures Project at the University of
there are 536 local governments in Cook
Illinois’ Institute for Government and Public
County),122 as well as outdated and
Affairs has created an All Funds budget model
inconsistent financial reporting processes. As
that aggregates General Funds and Other
a result, it is difficult to ensure that
State Funds into a smaller number of revenue
government services are being provided
and spending categories. The Fiscal Futures
efficiently and at the lowest possible cost to
Project’s model groups revenue and spending
taxpayers.
by State function using “fundamental, time-
consistent criteria,”119 allowing for comparison Reducing the number of local governments in
of actual revenues and spending over time. Illinois would have an indirect impact on State
finances since most local government revenue
When the Fiscal Futures Project first
comes from locally-imposed property taxes.
conceived the All Funds Budget, the process
However, local governments are recipients of
for aggregating spending and revenue data
revenues from some State-imposed taxes,
was manual and time-intensive. More
including income taxes123 and sales taxes.124
recently, however, the process has become
Reducing the cost of local governments
fairly automated. They receive data
through consolidation could reduce the need
automatically from the Comptroller’s office,
for revenue, leading to reduced property tax
which is then run through a computer
levies or reductions in transfers to local
program to group spending and revenue into
governments from the State.
programmatic categories. If the State decided
to require that the budget process include All The Local Government Consolidation section
Funds, there would be a relatively inexpensive in Part 2 of this report provides details about
and straightforward implementation process. the cost of local government in Illinois, as well
We urge State leadership to take action to as opportunities for achieving efficiency
improve budget transparency and require through consolidation. Although it is difficult
budget documents to include the Fiscal to quantify precisely how much taxpayers
Futures Project’s All Funds Budget and could save by consolidating governments, the
undertake a comprehensive review of the magnitude of potential savings is significant: a
State budget. 10% reduction in the cost of local government
would save Illinois taxpayers $3 billion. We
Consolidation of Local Governments continue to support consolidation efforts
According to the 2012 Census of (including enabling legislation) and encourage
Governments, Illinois is home to nearly 7,000 shared services between units of government.
units of local government. Revenues for these
local governments are nearly as much as the
State’s General Fund revenues and totaled
approximately $30 billion in FY16.120 (General
Fund revenues are projected to be
approximately $38.5 billion for FY19.)121

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 61


62
IV. Reform the Tax System to Reduce Illinois’ Negative
Outlier Status and Raise Revenues, as Needed
One of the key components of the Financial Framework is reforming
the tax system to reduce Illinois’ negative outlier status and raise
revenues, as needed. A state’s tax system is an important consideration
for job creators deciding where to locate or expand their businesses; as
such, it is critical that Illinois’ tax system is carefully designed so that it
raises sufficient revenue to provide necessary services without making
the State an outlier.

The Tax Policy Task Force conducted a that would raise needed revenues for the
thorough review of Illinois’ tax system, State without contributing to Illinois’ negative
consulting with tax policy experts and outlier status. These options included:
reviewing the findings of a proprietary
Increasing the personal income tax rate;
Business Tax Outlier study (prepared for the
Civic Committee in 2015), which compared Increasing the corporate income tax rate;
Illinois’ tax provisions to other states. A key Including consumer services in the sales
finding of this review was that Illinois’ tax base;
combined state and local revenues as a
Ending the exclusion of retirement income
percentage of its Gross State Product (GSP)
from the personal income tax base; and
was relatively low, but its combined state and
local taxes as a percentage of GSP was Means-testing tax exemptions by phasing
relatively high.125 them out at higher income levels.
In addition to providing options for raising
This is due to the fact that Illinois cannot
additional revenue, the Civic Committee
access some streams of revenue that other
identified reforms that would enhance Illinois’
states have access to (including higher levels
competitive position and reduce the State’s
of federal funding,126 as well as other own-
negative outlier status, including:
source revenues from state enterprises such
as public hospital systems), so the State relies Eliminating the Estate Tax;
more heavily on taxes for revenue. Eliminating the Corporate Franchise Tax;
Recognizing that the State has limited options
for non-tax own-source revenues and already Lowering the LLC fee; and
relies heavily on taxes, the Task Force Reforming burdensome administrative
emphasized that any tax increases must be practices and business tax provisions.
carefully considered and thoughtfully
targeted.

In Bringing Illinois Back, the Tax Policy Task


Force presented several tax policy options

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 63


Changes to Illinois’ Tax System revenue to address its financial challenges.
Some of the additional revenue need can be
Since Bringing Illinois Back was published,
met by aligning Illinois’ tax system with tax
there have been several changes to the State’s
policies in other states (such as ending the
tax system. These changes include:
exclusion of retirement income from the
Increasing the personal income tax rate income tax base and taxing consumer
from 3.75% to 4.95%; services), but the State’s financial challenges
Increasing the corporate income tax base are such that the State must consider other
rate from 5.25% to 7%; revenue options as well.

Increasing the Earned Income Credit for Illinois is a high-tax state: analysis from the
low-income taxpayers from 10% to 14% of Taxpayers’ Federation of Illinois estimates that
the value of the federal EITC; Illinois’ state and local taxes rank 11th highest
Phasing out personal exemptions and out of all states when adjusting for today’s
some tax credits for high-income higher income tax rates. 127 The State must
taxpayers; remain mindful about which revenue options
it pursues so it does not excessively increase
Reducing LLC fees;
Illinois’ negative outlier status and damage
Reinstating the Research and the State’s economy.
Development Tax Credit;
Our analysis indicates that the personal
Adding the Graphic Arts Sales Tax
income tax may offer the best opportunity for
Exemption to the Manufacturing
Machinery and Equipment Exemption; raising additional revenues while inflicting the
least damage possible on the State’s tax
Increasing the value of the K-12 Education
climate. According to the Tax Foundation’s
Expense Credit;
2019 State Business Tax Climate Index, Illinois
Adding an Instructional Materials and ranks favorably compared to other states on
Supplies Credit; and its personal income tax. With the current
Decoupling from the federal Domestic 4.95% tax rate in place, Illinois’ personal
Production Activities Deduction. income tax ranked 13th out of all states. By
contrast, the State ranked much lower on
Many of these changes were recommended
other tax types: 39th for the corporate income
as options by the Task Force and had a
tax, 36th for sales taxes, 45th for property
positive impact on State finances. However,
taxes, and 42nd for unemployment insurance
the State has not fully resolved most of its
taxes.128 It is likely that a personal income tax
financial issues: Illinois is still running annual
increase would not substantially change
deficits, the bill backlog is projected to be
Illinois’ ranking relative to other states.129 The
approximately $7.8 billion at the end of FY19,
estimated revenue impact of increasing the
and the State has not established an
personal income tax is substantial. A full
appropriate reserve fund.
percentage point increase, which would raise
While there is room for spending reductions the tax rate to 5.95%, would bring in an
in the General Funds budget and in Other additional $3.7 billion a year.
State Funds (as detailed in the “Scrutinize the
Entire State Budget for Spending Reductions”
section), the State will need additional

64
However, recognizing the impact of an Illinois has burdensome administrative
increase in the personal income tax rate, the procedures.
State should also consider measures to
provide tax relief to low-income families. For Taxes Other States Levy that Illinois Does Not
example, one way to achieve this goal would Illinois is an outlier because it does not levy
be to increase the value of the State’s Earned some taxes that other states do, including
Income Tax Credit. applying the personal income tax to
retirement income and extending the sales
With an increase in the personal income tax,
tax to consumer services.
the State would also need to consider an
increase in the corporate income tax. The
Extending the Personal Income Tax to
State has historically maintained a ratio
Retirement Income
between the personal income tax rate and the
corporate income tax base rate (in recent Illinois is one of only three states that has a
years, this ratio has been 7:5),130 but due to personal income tax and completely excludes
the State’s combined corporate income tax retirement income from taxation. The
rate131 being relatively high compared to structure of this exclusion is broad and
other states, the State should consider a inefficient; all retirement income (including
smaller increase. The estimated revenue pensions, IRAs, 401(k)s, Social Security, etc.) is
impact of increasing the corporate income tax excluded from taxation regardless of the age
base rate by one percentage point to 8% or income of the taxpayer.132
would be approximately $300 million.
The retirement income exclusion is one of the
In addition to ensuring that revenues State’s largest tax expenditures and costs the
(combined with spending reductions) are State billions in foregone revenue each year.
sufficient to fund necessary State services, the Additionally, the portion of income exempt
Civic Committee urges State leadership to from taxation under the retirement income
adopt tax policies that will reduce Illinois’ exclusion is growing much faster than taxable
negative outlier status. Several policy income in Illinois: the value of excluded
recommendations that fall under this income grew by 51% from 2007-2015,
category are described below. compared to 18% growth in the value of
taxable income during the same time
Reforms to Reduce Illinois’ Outlier period.133
Status
This exclusion is often discussed as a measure
Despite the recent changes made to the to protect low-income seniors, but in 2015,
State’s tax system, there are still a number of only about 13% of the value of the retirement
ways in which Illinois is an outlier compared income exclusion was associated with seniors
to other states: with incomes of $50,000 or less. The
remaining 87% benefited taxpayers who were
Other states levy taxes that Illinois does
younger, richer, or both.134 Additionally, the
not;
retirement income exclusion does not protect
Illinois imposes some taxes that other low-income seniors who have to work, since
states do not; and their wage income is fully taxable.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 65


Traditional analysis of taxing retirement It reduces the inequity between
income in Illinois generally assumes any tax working seniors and retired seniors. As
break for seniors will be attached to described above, seniors who work to
retirement income specifically (e.g., there supplement their retirement income
would still be an unlimited retirement income currently must pay full taxes on their
wages. Structuring tax relief so that it
exclusion but only for those with Adjusted
applies to all types of income would allow
Gross Income less than $100,000). However,
seniors to exempt wage income from
after thorough analysis of other states’
taxation as well.
retirement income tax provisions, there are
other approaches that Illinois could consider Implementation would be simple. The
that would cost less than the current 65 and over exemption already exists; the
legislature would only need to increase
retirement income exclusion and would more
the value.
precisely target tax relief to low-income
seniors than today’s unlimited exclusion. If the State were to eliminate the retirement
income exclusion and increase the 65 and
Broadly, these approaches can be separated over exemption to $15,000, it would bring in
into three categories: as much as $1.9 billion a year at a 5.95% tax
Provisions that limit the type of retirement rate.135 (This estimate is based on 2015 tax
income that is excluded from taxation; data and is therefore likely to be conservative;
when evaluated using today’s larger tax base,
Provisions that limit the amount of
the revenue impact is likely to be significantly
retirement income that is excluded from
taxation; and greater.)

Provisions that do not provide tax relief There are several different variations of this
based on the type of income, but instead policy proposal that that would affect the
provide tax breaks based on age and/or revenue estimate above, namely the State
income requirements. could increase or decrease the value of the 65
The Civic Committee recommends a policy and over exemption. For example, increasing
approach in line with the third category the value of the 65 and over exemption to
above: eliminating the blanket exclusion for $20,000 would decrease projected revenues
retirement income and providing tax relief to to $1.6 billion.
seniors by increasing the value of the 65 and The State should extend the personal income
over exemption. Providing tax relief through tax to retirement income by eliminating its
the 65 and over exemption provides the retirement income exclusion and increasing
following advantages: the value of its 65 and over exemption. Doing
Tax relief would be tied to age. The so would reduce Illinois’ status as an outlier,
current retirement income exclusion has raise much-needed revenue, and provide
no age requirement, so a younger person more targeted tax relief to seniors.
who inherits an IRA, for example, can take
distributions from it without paying taxes.

66
Taxes on Consumer Services To bring its sales tax system more in line with
other states, Illinois should extend the sales
Illinois’ state and local sales tax136 rates are
tax to include more services, focusing on
frequently cited as some of the highest in the
consumer services to avoid taxing business-
nation. According to recent analysis by the
to-business transactions.142 In 2017, the
Tax Foundation, Illinois’ combined State137
Commission on Government Forecasting and
and average local rate is 8.7%, making it the
Accountability (COGFA) produced estimates
7th highest in the country.138 However, Illinois’
for how much revenue the State could expect
sales tax revenues as a percentage of GSP are
if it taxed services like neighboring states. The
relatively low compared to other states with a
revenue estimates at full compliance143 range
sales tax; by that metric, Illinois’ sales tax
from $179 million (taxing six additional
revenues ranked 34th lowest among all states
services currently taxed by Kentucky) to $1.2
in FY16.139 It is important to note that in
billion (taxing 81 additional services that are
addition to general sales taxes, Illinois levies
currently taxed by Iowa).144
excise taxes on certain goods and services,
including on tobacco products, hotels, and Recognizing that the mix of services taxed in
various utilities.140 If excise taxes are other states may or may not make sense for
accounted for in the ranking of state and local Illinois, the Task Force recommends
sales taxes as a percentage of GSP, Illinois’ identifying a set of services to tax that would
ranking climbs to 25th. bring in an additional $500 million in revenue.

The fact that Illinois has relatively low state


Taxes Illinois Imposes That Other States Do
and local sales tax revenues despite relatively
Not Impose
high tax rates is likely due to a few different
factors that narrow the State’s sales tax base. Two examples of taxes that Illinois imposes
The first factor is Illinois’ use of excise taxes that most other states do not are the
on goods and services that may fall under a Franchise Tax and the Estate Tax.
general sales tax in another state; the second
factor is that Illinois taxes fewer services than Capital-Based Portion of the Franchise Tax
most other states. Illinois’ Franchise Tax is levied on corporations
doing business in the State. Broadly, there are
States with a sales tax tend to include most
two components: registration/filing fees on
goods but few services in their sales tax base,
corporations, as well as a capital-based tax. 145
despite the shift to a more service-based
economy. Very few states could be described The fee portion includes the fees that
as having a broad-based sales tax on services, corporations pay when they initially form or
but Illinois stands out because it taxes even register, their annual report fee, and
fewer services than most. According to a 2017 reinstatement fees. All states require
survey of states by the Federation of Tax corporations to file and pay an annual fee for
Administrators, Illinois taxed 29 out of 176 the privilege of doing business.
services they track; the number of services
taxed by the median state is 60.141 By taxing The tax portion is made up of three
fewer services than most states, Illinois’ tax components: the initial franchise tax (imposed
base is much narrower, making it an outlier. when a corporation begins doing business in
Illinois), the annual franchise tax (an annual

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 67


tax of 0.1% on paid-in capital),146 and an making it an outlier. It applies to estates
additional franchise tax (imposed whenever valued at more than $4,000,000 and taxes
events trigger an increase in the corporation’s assets at graduated rates ranging from 0% to
paid-in capital).147 According to the Tax 16% (only the state of Washington has a
Foundation, only 16 states have a capital- higher top marginal rate on its estate tax at
based tax, and two of those states are in the 20%).151 The Estate Tax is projected to bring in
process of phasing it out.148 roughly $290 million for FY19.152

The fact that Illinois has a Franchise Tax The federal government has had an estate tax
makes it a negative outlier, but there are in place since 1916,153 enacted against the
business-related concerns about the backdrop of rising concentration of wealth,
Franchise Tax that the State should consider and progressives advocating for estate and
as well. For example, the method for inheritance taxes as tools to address income
calculating the Franchise Tax in Illinois is inequality.154 At that time, many states also
complicated and burdensome and can lead to had estate or inheritance taxes, but more
tax pyramiding. Tax pyramiding, in turn, can states enacted them after a federal tax credit
negatively impact business formation, for state estate taxes was created (1924) and
expansion, and investment.149 later increased (1926). Initially, the credit was
capped at 25% of federal estate tax liability;
The Franchise Tax (including both the tax and
Congress later increased the credit to 80% of
fee portion) is expected to bring in
the federal estate tax liability. 155
approximately $205 million for FY19.150
States that already had estate and inheritance
Since it discourages business formation and
taxes responded by modifying them to take
investment and makes Illinois an outlier, the
better advantage of the credit. States
capital-based tax portion of the Franchise Tax
frequently designed their estate taxes as
should be repealed by the State. However, the
“pick-up taxes,” where the amount of state tax
State should continue to charge corporations
liability was equal to the maximum value of
filing and registration fees (since that is
the federal credit.156 These pick-up taxes
standard practice for other states) and should
captured tax revenue that, absent a state level
set these fees at a level that is competitive
estate tax, simply would have gone to the
with other states. This would lessen the
federal government. As a result, they did not
budget impact of repealing the Franchise Tax
increase a taxpayer’s overall tax liabilities.
entirely and would not make Illinois an outlier.
Instead, they merely shifted tax revenue from
the federal government to state governments.
Estate Tax
There are two types of taxes triggered by a This changed when the federal tax credit for
person’s death: an estate tax, which is state estate taxes was phased out with the
imposed on the net value of an estate before passage of the Economic Growth Tax Relief
it is distributed to inheritors, and an Reconciliation Act (EGTRRA) in 2001; the tax
inheritance tax, which is paid by heirs or credit was completely eliminated by 2005.
beneficiaries upon receipt of a bequest. After the credit’s elimination, state estate and
inheritance taxes imposed an additional tax
Illinois is one of only 13 states that has an burden on estates. As a result, many states
estate tax (six others have an inheritance tax), repealed their estate taxes or had their estate

68
taxes effectively zeroed out if their statute or merely changing their reported state of
was directly tied to the federal credit.157 residence.160 Regardless of whether or not
these changes are due to actual migration,
The fact that Illinois has an estate tax after
this study provides evidence of behavioral
most other states repealed them makes it an
responses to state tax policy by high-wealth
outlier. While it may make policy sense for a
individuals.
federal estate tax to exist as a tool to raise
revenues in a progressive way, the lack of The migration of high-wealth individuals to
estate taxes in most states has created a other states may have negative effects on
competitive tax environment in which states philanthropy. A study of migration to and
that still have an estate tax are at a from New Jersey from 1999-2008 showed how
disadvantage. The existence of Illinois’ estate changes in the migration patterns of high-
tax provides an incentive for the State’s wealth households can impact a state’s
wealthiest residents to move to another state capacity for charitable giving. From 1999-
(and stop paying other taxes and otherwise 2003, the net effect of migration into New
contribute to the State’s economy) or shift Jersey resulted in a substantial increase in
their assets and investments to other states household wealth and charitable capacity.
so that they will not be subject to the Illinois From 2004-2008, the migration flow was
estate tax. reversed: fewer high-wealth households
migrated to New Jersey, and there was a
A working paper from the National Bureau of
moderate uptick in the number of high-wealth
Economic Research supports this concern
households leaving the state. (Note: the study
about Illinois’ competitiveness. The study
does not address reasons why this migration
looked at federal estate tax returns across all
flow was reversed). The resulting change in
states over an 18-year period and showed
estimated charitable giving capacity (based on
that there is a relationship between a state’s
the wealth of migrating households) was a
effective estate and inheritance tax rates and
reduction of approximately $2 billion.161
the number of federal estate tax returns filed
in that state.158 For every one percentage Since most other states no longer have an
point increase in the effective estate and estate or inheritance tax, the existence of an
inheritance tax rate for a state, the number of estate tax in Illinois creates an incentive for
federal estate tax returns filed in the state high-wealth residents to move out of state or
declined by 1.4% to 2.7% (depending on the otherwise modify their behavior to avoid the
model used). The number of returns for the tax. The potential negative consequences of
highest wealth estates ($5 million or more) Illinois’ wealthiest residents leaving the State
were even more sensitive to estate and outweigh the benefits of having an estate tax
inheritance effective tax rates: for a one in place. Illinois should repeal its estate tax so
percentage point increase in a state’s effective that it removes the additional incentive for
estate and inheritance tax rate, the number of high-wealth individuals to move out of state
returns in this wealth category declined by and aligns its tax policy more closely with
nearly 4%.159 other states.

It is unclear if the reduction in federal estate


tax returns filed in a given state is due to high
wealth individuals actually moving out of state

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 69


Burdensome Administrative Practices To make Illinois’ administrative practices less
burdensome, the General Assembly should
Illinois has a history of burdensome
amend the False Claims Act to exclude tax
administrative practices that made it an
laws. In addition, it should reduce the
outlier compared to other states. Many of the
penalties listed in the Uniform Penalty and
issues we raised in Bringing Illinois Back have
Interest Act to align them more with the tax
improved, including how the State provides
penalty structures in other states. Addressing
advice to business taxpayers and its
these administrative issues would not be
implementation of corporate tax credits.
costly to the State but would go a long way
However, there are still some issues that toward improving the tax and business
remain a concern, including the Illinois False climate.
Claims Act. Under this law, private parties are
allowed to assert a tax liability against
business taxpayers. Most other states have
excluded all tax laws from their False Claims
Acts, and Illinois is an outlier because it does
not have such an exclusion.

Illinois’ tax penalty structure also makes it an


outlier. Penalties are imposed to incentivize
compliance and timely payment, and Illinois’
financial penalties are higher than many of its
peers. In addition, according to the 2015
Business Tax Outlier Study, Illinois’ tax penalty
structure may discourage voluntary
compliance due to the fact that penalties are
imposed even when taxpayers self-identify
errors on previous returns. Taxpayers also
face increased penalties if they disagree with
the Illinois Department of Revenue and
exercise their right to contest an assessment
of additional tax liability, unlike most other
states.162

70
V. Establish Goals and Metrics to Measure the State’s
Progress
The final element of the Financial Framework is to establish goals and
metrics to measure the State’s progress. The original goals and metrics
have largely remained unchanged; it is still a goal to achieve an S&P
credit rating of AA, as well as achieve several additional short- and long-
term goals.

The goal of the Tax Policy Task Force is to take Immediate increases to pension funding
a holistic approach to improving the State’s to accelerate the time frame for reaching
finances and business climate. Our the “tread water” level and stopping the
Framework provides a blueprint for the policy growth in the State’s unfunded pension
changes necessary to bring Illinois back to liabilities;
financial solvency; together, our Meaningful expense reductions based on
recommendations provide a comprehensive a comprehensive review of spending
plan that will improve Illinois’ economic across the entire State budget; and
performance, reduce uncertainty, and move Reform of tax provisions and practices
the State towards a AA credit rating. that make Illinois an outlier compared to
other states.
Short-Term Goals
Since 2017, there has been very limited
In the near term (in the next fiscal year after progress on achieving the short-term goals
full implementation of the Framework), the outlined in the Framework. The State has
State should focus on making changes that reduced the structural budget deficit, but it
will lay the groundwork for improving Illinois’ has not been fully eliminated, nor has it fully
financial standing and eventually achieving an addressed amortization of the unpaid bills.
increase in the State’s credit rating. The State also reformed some tax practices
that made Illinois an outlier compared to
These goals include:
other states, but there are several reforms
Implementation of a long-term financial that remain unaddressed. The State has not
planning process that is transparent, made progress on implementing transparent
implements best practices, and includes long-term financial planning processes,
the entire State budget; making contributions to the State’s pension
A structurally balanced annual budget and systems that are sufficient to keep the
the amortization of the State’s unpaid unfunded liability from growing, or making
bills; meaningful expense reductions across the
entire State budget.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 71


Long-Term Goals S&P Credit Rating
We have identified several long-term goals (to An additional long-term goal identified by the
be achieved within five years of full Task Force is to achieve an upgrade in the
implementation of the Framework), which set State’s S&P credit rating to AA. The credit
targets for economic performance. These rating was selected as a metric not only
goals include: because it affects the State’s costs in issuing
bonds, but, more fundamentally, because it
Sustained achievement of the median
encompasses many of the economic
level of performance among the 50 states
indicators and measures of government
for employment growth, GSP growth, and
unemployment rate; management that the Task Force identified as
important to improving Illinois’ overall
Achievement of “Top 10” performance
financial status.
among all 50 states for per capita income;
Some of the metrics built into the S&P credit
Elimination of the State’s unpaid bills; and
rating include:
Establishment of a reserve fund that
equals more than 8% of Debt and liability metrics (including
revenues/expenditures. pension liabilities);

Although it has only been a year and a half Budgetary performance metrics (including
since Bringing Illinois Back was published (and, the level of reserves);
therefore, it is too soon to judge how Illinois is Economic indicators (including Gross State
doing with respect to long-term goals), we can Product and income per capita);
look at Illinois’ recent performance to see if
Government framework measures
the State is on track to meet its long-term
(including whether the state has a
goals. The State has improved its position balanced budget amendment); and
relative to other states on its unemployment
Financial management measures
rate and remained in the same position for
(including measures around budget
per capita personal income, but its position
forecasting).
has declined relative to other states on
employment growth and GSP growth.163 For The five elements of the Financial Framework
example, Illinois is: represent a comprehensive set of actions that
will improve Illinois’ standing on many of
34th out of the 50 states for these metrics and will advance the goal of
unemployment rate (previously 43rd). reaching a AA credit rating. As specific policy
36th out of the 50 states for employment proposals are made to address the State’s
growth (previously 37th). financial issues, the Task Force will evaluate
41st out of the 50 states for GSP growth them together as part of a comprehensive
(previously 18th); and plan to determine whether that set of actions
will move the State toward AA.
15th out of the 50 states for per capita
personal income (previously 15th).
Issues the State Must Address to Improve the
In addition, the State has not fully eliminated Credit Rating
the bill backlog, established a reserve fund, or
There are four areas that are continually
reduced outstanding debt.
mentioned as negatives by credit rating

72
agencies when they review Illinois’ credit: the Pension Liabilities
lack of a structurally balanced budget, the bill
The State’s pension liabilities are another drag
backlog, pension liabilities, and the lack of a
on its credit rating. Although there is a
rainy day fund.
statutory contribution schedule in place, it is
not seen as a credible funding plan because it
Lack of a Structurally Balanced Budget
does not aim for 100% funding and it
Despite the State’s balanced budget increases contributions in the later years of
amendment, Illinois has had significant the schedule to a degree that makes it
structural deficits for years. When Bringing unlikely the State could ever pay them.
Illinois Back was originally released, the Additionally, the State’s current pension
projected structural deficit (assuming no contributions are not sufficient to keep the
major policy changes) was approximately $7 unfunded liability from growing. In order to
billion a year. Since the personal income tax demonstrate that the State is serious about
and corporate income tax rates were addressing its pension problems, it needs to
increased, the structural deficit has been re-evaluate the contribution schedule
significantly reduced. As such, the gap (whether through making supplemental
between revenues and expenditures for FY19 contributions, changing the payment
was small enough that a combination of schedule, etc.) so that it represents a credible
premature savings assumptions, one-time plan to pay down its unfunded pension
revenues, and interfund borrowing were liabilities.
enough to “balance” the enacted FY19 budget
and show a small surplus. However, recent Lack of a Rainy Day Fund
projections from the GOMB show that the
Lastly, Illinois needs to establish a robust
deficit is actually more than $1 billion.164
reserve fund in order to provide sufficient
funds to operate State government should
Bill Backlog
there be an economic downturn or some
The bill backlog is another factor that has a other budgetary shock. A healthy reserve fund
negative impact on the State’s credit rating, (as determined by S&P) should be at least 8%
primarily because the State does not have a of general revenues; as such, Illinois should
plan in place to eliminate it. After issuing aim to have a reserve fund of $4-5 billion. This
bonds last year to pay down part of the could be achieved in five years if the State
backlog, the State has not taken steps to budgeted $1 billion a year; in the meantime,
address the remaining unpaid bills, which are making significant contributions to the rainy
expected to total $7.8 billion at the end of day fund would demonstrate to the rating
FY19. Amortizing the remaining unpaid bills agencies that Illinois is taking steps to
over the next five years will put additional improve its financial management practices.
strain on the State budget. The State needs to
enact a plan to eliminate the bill backlog and
then budget for the additional funding
needed.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 73


Illinois has a long road ahead to improve its In April of 2018, State of Illinois General
financial situation enough to achieve an Obligation (GO) Bonds were trading at
upgrade in its credit rating to AA. As specific approximately 215 basis points over the AAA
policy proposals are made to address Illinois’ Municipal Market Data (MMD) Curve, which is
finances, the State should ensure that it a benchmark yield curve for AAA-rated GO
evaluates them as part of a set of actions that bonds. More recently, that spread has
would advance the goal of a credit rating narrowed to about 185 basis points.
upgrade. Any plan the State advances should Nonetheless, the State of Wisconsin’s GO
lay the groundwork for financial solvency, bonds (rated Aa1/AA/AA+ by Moody’s, S&P,
improving Illinois’ overall financial status and, and Fitch, respectively) are currently trading at
as a result, put the State’s credit rating on an about 10 basis points over the AAA MMD. If
upward trajectory. Illinois takes the steps necessary to improve
its finances and return to its previous AA
Financial Impact of Improving the Credit status, its bonds may trade as much as 175
Rating basis points lower than currently. On a
Achieving AA status is important for Illinois hypothetical $500 million serial issue with
because the rating encompasses a number of equal principal amortization over a 25-year
meaningful financial fundamentals that the period, that could amount to more than $113
State must achieve. The rating serves as a million in debt service savings over the life of
single, objectively evaluated measure of the bond issue.165
Illinois’ progress towards achieving sound
financial footing.

Additionally, an upgrade in the State’s credit


rating is important because Illinois’ near-junk
ratings increase the costs of borrowing to
levels far higher than peer states. Illinois’
bonds are riskier, so the State has to pay
much higher interest rates than it would if its
credit rating were better. In addition, the
State’s low rating impacts all bond-issuing
entities (such as local governments,
universities, and school districts) in the State.

74
Part 2:
Additional Reforms to
Improve the Jobs Climate

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 75


Local Government The patchwork of local governments in Illinois
makes it nearly impossible for policymakers
Consolidation and the public to provide effective oversight
or identify opportunities for efficiency and
According to the U.S. Census Bureau, Illinois savings. At a minimum, the State should work
has the largest number of local governments to promote and facilitate local government
of any state in the nation, with nearly 7,000 consolidation, specifically through passing
individual local units of government. (The legislation to allow all local governments to
state with the second most governments, consolidate and working to improve financial
Texas, has roughly 2,000 fewer units of reporting and local government data. If
government.)166 One of the reasons for the necessary, the State also should consider
high number of governments is that in alternative methods for achieving
addition to a large number of multi-purpose consolidation, including an incentive system
governments (e.g., county, city, village, and or a consolidation mandate.
township governments), Illinois also has
special purpose governments that provide a Funding of Local Governments
single service, such as fire protection, parks,
In FY16, local government revenues for
and mosquito abatement. The multiplicity of
general and special purpose governments
local governments makes it difficult for
totaled nearly $29.5 billion from a
taxpayers to understand which services are
combination of local, state, and
provided by which government, where their
intergovernmental sources. The majority of
tax dollars are going, how wisely the money is
being spent, and who is accountable. revenue (53.5%) came from local taxes. 167
However, some local governments rely more
The review of local government consolidation heavily on local revenues than others; for
in our 2017 report discussed the example, library districts, fire protection
consequences of having so many local
districts, and townships all receive the vast
governments in the State, including the costs
majority of their funding from local sources
borne by local taxpayers, the loss of effective
(93%, 83%, and 78%, respectively).168
oversight, and lack of transparency. While the
focus of the Tax Policy Task Force and Bringing Local revenues consist of property taxes,
Illinois Back was State finances, it became locally-imposed sales taxes, utility taxes, and
clear through the Task Force’s work that local other local taxes. Property taxes make up the
governments and State finances are lion’s share of local government funding
intertwined issues and that significant (33.4%), but there are some differences
reforms are necessary to improve budgetary between governments in how much they rely
and financial processes across all units of
on property taxes. For example, counties and
government. Consolidation and increased
municipalities receive only 31.2% of their
reporting requirements will help to provide
combined total revenue from property taxes
citizens with critical information for decision
since they receive funding from many
making and to eliminate unnecessary
spending. different sources, including local sales taxes

76
and transfers from State government. By Illinois’ average local sales tax rate was 2.45%,
contrast, library and fire protection districts making it the 13th highest average local rate of
(which rely most heavily on local sources as all states and bringing Illinois’ combined state
described above) get more than 80% of their and local sales tax rate to 8.7%.171
combined total revenue from property
In addition to locally imposed taxes, the State
taxes.169 provides additional sources of funding for
The other three major local revenue sources – local governments:
local sales taxes, utility taxes, and “other local
The state-imposed Personal Property
taxes” – make up roughly 20% of all local Replacement Tax is distributed to local
government funding. However, like with governments based on their share of
property taxes, there are differing levels of personal property tax collections in the
reliance on these taxes because not every late 1970s. The Personal Property
governmental body is allowed to levy them. Replacement Tax totaled $1.7 billion in
Municipalities, which can levy all three, receive FY17;172 and
approximately 17% of their funding from The State also transfers to local
these local sources. Counties, which can only governments a portion of personal and
levy two of these three additional local corporate income taxes through the Local
sources of revenue (they cannot levy utility Government Distributive Fund (LGDF). For
taxes), receive only 5.9% of their funding from FY19, counties and municipalities will
these sources. receive approximately $1.25 billion from
the LGDF.173
The heavy reliance on local tax revenues for
With nearly $30 billion in revenues, the
funding local governments and the
amount of funding local governments receive
multiplicity of local governments is one of the
from State and local sources is significant. As
reasons Illinois’ sales and property taxes are
such, it is critical that policymakers and
so high compared to other states. Recent
citizens review local government operations
analysis by the Taxpayers’ Federation of and finances and look for opportunities to
Illinois shows that Illinois’ effective property become more efficient in the provision of
tax rate (2.03%) is 2nd highest of all states, services.
behind only New Jersey.170 In addition, recent
analysis by the Tax Foundation shows that

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 77


School Districts
It is valuable to look separately at school districts, since they are an important driver of the large
number of local government units and receive a disproportionate share of local property taxes. In
2016, Illinois had 897 school districts, which represented 15% of the 6,045 units of local government
with the authority to levy property taxes. However, school districts received 62% of the total
property tax revenues.174

Figure 4: Property Tax Extensions by Type of District

Note: School districts include community college districts in this analysis. Source: Illinois Department of Revenue website; Property Tax
Statistics: Tables 3 and 4.

78
Consolidation of these 897 school districts government departments and many
could result in significant cost savings, which independently administered agencies
in turn could translate to lower property tax implemented a variety of reforms, including
costs for taxpayers. creating a portal to increase public access to
However, school district consolidation may be related information, implementing
beneficial for non-financial reasons as well. standardized procurement and ethics policies,
Small school districts are often unable to creating shared services and cooperative
provide robust educational offerings to their purchasing agreements, and dissolving or
students; if those smaller districts consolidating local governments. Together the
consolidated and formed larger school efforts have saved more than $100 million.177
districts, they may be able to improve their In another study, the Center for American
educational offerings. For example, a national Progress analyzed the additional costs of
study by the University of New Hampshire’s small, non-remote school districts across the
Carsey School of Public Policy found that country. They identified 382 non-remote
remote rural districts with small populations school districts in Illinois with fewer than
are nearly 10 times less likely to offer access 1,000 students and estimated that those
to AP courses than are larger rural districts districts create an additional cost of $91
million. This places Illinois 3rd highest in the
closer to urbanized areas.175 Similarly, in
country for states with high costs due to
neighboring Indiana, a Ball State University
small, non-remote school districts, behind
study found that only 55% of the smallest
only New Jersey and New York.178
districts offer an introductory physics class
compared with 83% of districts with between In addition, the Lieutenant Governor issued
2,000-2,999 students. Likewise, the likelihood the second edition of the Journal of Local
of offering high school calculus classes Government Shared Service Best Practices in July
increased with the size of the school 2018,179 which outlined several reforms to
district.176 make local government more efficient,
effective, and streamlined. It described 20
Potential Cost Savings projects that illustrate the type of progress
and savings local governments have seen as a
It is difficult to precisely quantify the benefits of result of sharing services:
consolidating local governments. The lack of
transparency, inadequate reporting, and the The Fieldcrest and El Paso-Gridley
sheer number of individual units of government districts consolidated some of their bus
impede efforts to measure the impact. services saving 33% ($6,000) and 40%
($4,000), respectively.
However, in addition to increasing efficiency and
eliminating redundancies, direct financial Two school districts both located in
benefits will result from reducing the number of LaGrange now share a communications
local government units. director, saving $25,000 per year.

Several examples underscore this reality. One


example described in Bringing Illinois Back is
the DuPage County ACT Initiative. The
multifaceted initiative involving county

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 79


New Holland-Middletown and Midwest Annual Financial Report; governments
Central school districts found a variety of appropriating less than that amount must
ways to share transportation services only submit a Verification of Appropriation
saving more than $120,000 in the first
form.180
year with potential for additional savings
in future years. The Comptroller’s Office compiles a Fiscal
While some of these projects involve low Responsibility Report Card based on the
absolute dollar amounts, the savings are financial reports submitted by local
significant in these small budgets and, if they governments, which provides the high-level
are replicated across Illinois’ nearly 7,000 revenue and expenditure data used in the
units of government, the cumulative analysis above. In addition, there are financial
reductions can be meaningful. reports and Individual Data Summaries for
governments on the Comptroller’s website
Consolidation Challenge: that provide basic financial information on
Quality of Financial Reporting general and special funds, equity, net assets,
Because of the State’s high local taxes etc. However, the ability to use the data in a
(property taxes in particular), examining the meaningful way is hindered by a number of
finances of local governments and factors.
determining where there are opportunities
First, the financial reports are often inaccurate
for achieving efficiencies (e.g., consolidation,
or missing information. Information is self-
shared services, etc.) is frequently discussed
as a solution for reducing the cost of local reported and, although the Comptroller’s
government. However, the lack of quality Office attempts to reconcile issues like
financial data on local governments is a mathematical errors or misclassified data,
serious impediment to conducting any sort of there are no guarantees that data is
meaningful analysis. correct.181 In addition, governments are not
required to use the same accounting methods
There are disparate financial reporting
(e.g., some use cash basis, some use a
requirements for local governments
modified accrual basis) so comparisons
depending on a number of factors, including
between governments may not be strictly
the type of government, total appropriations,
apples-to-apples. Lastly, the information that
and whether the district has bonded debt.
is publicly available is not in a usable format –
The most stringent financial reporting is
the Fiscal Responsibility Report Card data and
required for: counties with a population
metrics are viewable on the website itself or
between 10,000 and 50,000; municipalities
as a PDF, but there is no option for
that have bonded debt, a population over 800,
downloading the data into an Excel
or that own and operate a public utility;
spreadsheet or other usable format.
special purpose governments that have total
revenues over $850,000; and townships with Consolidation Challenge:
total revenues over $850,000. These
Statutory Limitations
governments must file an audit each year. All
other governments with more than $7,367 in Another impediment is statutory barriers to
local government consolidation. As was
appropriations (as of 2017) must file an

80
described by the 2015 Task Force on Local Senate Bill 3236: Requires that School
Government Consolidation and Unfunded Report Cards include data on school
Mandates, there are two legal issues that districts’ administrative costs;
make it more difficult for governments to House Bill 5123: Authorizes the DuPage
consolidate: County Board, by ordinance or resolution,
to dissolve the County Election
Existing consolidation-related laws are
Commission and to fold its duties into the
narrowly crafted and often only apply to a
Office of the County Clerk; and
single government unit, not the whole
State; and House Bill 5777: Streamlines the
dissolution process of a defined group of
There is no statutory process for citizens
county appointed agencies. (Originally the
to initiate government consolidation in
Act only included DuPage County and was
many instances and for situations in
expanded to all counties in the State.)
which consolidation processes exist
requirements are burdensome and These measures add to previous successes in
significantly hamper efforts. local government consolidation. We will
continue to support consolidation efforts by
As such, government consolidation efforts to
local governments, as well as legislation that
date have largely been incremental.
enables governments to consolidate and/or
Local Government Consolidation Success provides incentives (or even mandates) to do
Stories so.

There has been some progress in addressing Opportunities for Improvement


local government consolidation, primarily in
In addition to the legislature passing new
the form of legislation that enables local
legislation to enable and promote
governments to consolidate. In 2017, the
government consolidation, there are
General Assembly passed bills related to
significant opportunities to improve local
streamlining, reducing costs, or increasing government data and use that data to make
transparency of local governments that were local units more efficient.
signed into law. This legislation includes:182
The Transform Illinois coalition, which is
Senate Bill 2299: Prohibits people in composed of local elected officials, civic
elected township roles from being organizations, and research institutions, is
employed by the township;
currently working on a project to improve
Senate Bill 2459: Allows for the data reported by local governments. The goal
dissolution of some districts in Lake of the project is to better align the Annual
County, including the Seavey Drainage Financial Reports that most local governments
District and the Lakes Region Sanitary are required to file with the type of
District, and transfer of the powers,
information required in government
assets, and responsibilities from the
Comprehensive Annual Financial Reports. In
districts to the Lake County Board;
addition, the project aims to increase the
Senate Bill 2543: Provides a mechanism efficiency of reporting, make reporting more
for mosquito abatement districts to reliable and useful, and create fiscal health
consolidate with neighboring entities; indicators so that comparisons may be made
across government entities. The Civic

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 81


Committee strongly supports the efforts of results to improve its delivery of services. For
Transform Illinois to improve the data on local FY02-FY03, the Benchmarking Project’s report
government finances. showed that Winston-Salem’s residential
refuse collection service was the most
However, the existence of better data is not a
expensive per ton of all comparison
panacea; rather, governments must use the
municipalities. The city used those results to
data to analyze and compare their
make changes to its refuse collection service
performance to other similar governments.
and reduced its operating costs.184
North Carolina’s Local Government
Performance Measurement Project serves as Efforts to make local government more
a valuable example of transparency and the efficient and effective in Illinois would benefit
power of data to transform practice. greatly from access to data similar to what is

Beginning in 1995, governments in North available in North Carolina. However, the


Carolina undertook a comprehensive review State has a long way to go before it has the
and reporting of extensive city-level data on capacity to produce quality data that could be
the services offered in 15 municipalities, used to improve efficiencies; the necessary
including the top three largest in the state. first step will be clearly reported local
The goals of the project were to expand the government data. We reiterate the data-
use of performance measurement in local related recommendations we made in
government, to produce reliable performance Bringing Illinois Back:
and cost data for comparison, and to facilitate
Require all local governments to report
the use of performance and cost data for
full and accurate financial data to a single
service improvement.
State repository;
Data included not only financial data, but also Require all local governments to report
data related to the services provided by the information in a standardized, consistent
government (e.g., for Fire Services, service format; and
data includes things like the number of fire
Provide tools, training, and other supports
stations, the number of fire department
to local officials to meet these new
responses, and fire code violations that had requirements.
been reported that year). Since that time, the
report has been produced annually, although
the number of participating municipalities and
services evaluated has not remained
constant. It currently includes data on 13
services, including refuse collection, recycling,
police, water, parks, and more. 183

Using this data to compare their performance


against other municipalities, city leaders can
identify high-performing peers and areas for
improvement. Winston-Salem, one of the
participating cities in the North Carolina
project, provides a good example of using the

82
We also continue to support measures to
enable and promote local government
consolidation that were recommended by the
State’s Task Force on Local Government
Consolidation and Underfunded Mandates,
including:

Empowering Illinois citizens to consolidate


or dissolve local governments via
referendum;
Expanding DuPage County’s consolidation
program to all 102 counties;
Allowing all townships in the State to
consolidate with coterminous
municipalities via referendum;
Protecting the Intergovernmental
Cooperation Act to preserve the ability of
local governments to coordinate; and
Empowering State agencies to incentivize
local government consolidation and
cooperation.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 83


84
P-12 School Funding A hold-harmless provision to ensure that
no district receives less State funding than
Reform it received the prior year;
A $350 million year-over-year increase in
When the Civic Committee released Bringing education funding (contingent on annual
Illinois Back in May 2017, we recommended appropriations) that is distributed through
adopting a new school funding formula to the new formula. Up to $50 million of that
reduce funding disparities between high- and money can be used for property tax relief
low-income districts and ensure fair and grants for high-tax, low-wealth districts;
equitable treatment for all Illinois students. We A narrower range of funding that districts
supported the framework developed by the must provide to charter schools, changing
Illinois School Funding Reform Commission, the range from 75-125% of the per capita
which identified reform elements that were tuition charge (PCTC) to between 97% and
critical for any new school funding model. 103% of the PCTC;

Soon after the conclusion of the Commission, Relief for school districts regarding
driver’s education and physical education
the General Assembly considered competing
mandates; and
bills. Both were based on the Evidence-Based
Model (EBM), an approach whose underlying A program providing a 75% tax credit (up
principles – calculation of a unique Adequacy to $1 million) for contributions to
Target for each school district based on student organizations that provide scholarships
for low-income students to attend non-
demographics, accounting for local resources
public schools.
and differentiating what each district is
expected to contribute, and the creation of a The new law also includes Chicago-specific
distribution system that ensures State money provisions, including:
goes to the neediest districts first – complied
Pension parity for Chicago Public Schools
with the Commission’s framework.
(CPS) by providing State funding for the
The compromise bill that eventually emerged, normal cost of pensions and retiree
Senate Bill 1947 (the “Evidence-Based Funding healthcare costs through new provisions in
the State’s pension code;
for Student Success Act”) was signed into law on
August 31, 2017. Recognition in the funding formula of CPS’s
payments to amortize its unfunded pension
Key Provisions of the New School liabilities;
Funding Law185 The elimination of CPS’s block grants (while
The Evidence-Based Funding for Student keeping that funding as part of the hold-
harmless provision that ensures no district
Success Act fundamentally changes the way the
receives less State funding than it received
State provides education funding to local school
the prior year); and
districts. The law’s general components include:
An increase in the dedicated property tax
An evidence-based school funding that CPS may levy for teacher pensions,
formula that prioritizes school districts from .383% to .567%.
with the greatest need and least property
wealth;

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 85


Evidence-Based Funding Model Impact CPS’s unfunded liabilities will eventually be
on State Finances covered by State funding.

The primary impact of the new school funding Lastly, the new scholarship donation tax credit
law on the State’s finances is the provision will cost the State as much as $75 million a
calling for an increased financial contribution year (until it sunsets on January 1, 2024).189
from the State each year. The actual cost to the State will depend on
how many taxpayers claim the credit and
First, the law calls for an additional $350
what the value of each credit is.
million in State funding each year until school
districts reach their Adequacy Targets. Key Areas to Monitor in the Future
Beginning in FY19, part of the $350 million
target can be used for property tax relief – all The new school funding formula is an
new education money up to $300 million will important step forward in establishing a
be run through the formula, and anything school funding system that is fair and
above that amount will be directed to the equitable for all students. However, there are
Property Tax Relief Pool Fund until it has a a few areas the State needs to monitor going
balance of $50 million.186 All funding increases forward to ensure that the law works as
are subject to yearly appropriations by the intended.
legislature.
Pension Provisions
Second, the State assumed the normal cost of
One of the major issues that came up during
teacher pensions and retiree healthcare for
the School Funding Commission and debates
CPS which will be provided through a
around school funding proposals was the
continuing appropriation (which does not
issue of pension parity. Historically, the State’s
require yearly legislative approval). The costs
annual pension contributions for teachers
are variable but amount to roughly $240
(including the normal cost and payments to
million for FY19.187
amortize unfunded pension liabilities) have
Third, the State will begin indirectly picking up covered costs for all school districts except
the cost of unfunded liabilities for Chicago CPS. Since Chicago was the only district in the
teacher pensions. The new formula contains a State that was required to pay the employer
provision that allows for the reduction of share of its teacher pension costs, Chicago
CPS’s local contribution by the amount of its taxpayers were on the hook for the costs of
annual payment to amortize unfunded their own teacher pensions (through local
pension liabilities (currently more than $570 property taxes) as well as the cost of every
million).188 By allowing this reduction, CPS’s other school district’s pensions (through
Adequacy Gap (the difference between what State-imposed taxes).
CPS contributes locally and the district’s
Adequacy Target, the amount the State is
expected to cover over time) is increased.
Since funding from the State is incremental, it
will take many years at current funding levels
for the full value of this provision to be
realized, but the annual payments to amortize

86
To address this inequity, the compromise bill Additionally, if there were a normal cost shift
included some provisions to ease CPS’s and non-CPS districts ever accumulated
pension burden: unfunded pension liabilities, those districts
would receive a reduction in their Local
The State pension code was amended to
Capacity Targets like CPS does currently,
provide a continuing appropriation for
meaning that they would be expected to
CPS’s normal costs; and
contribute fewer local dollars than they
Recognition of CPS’s payments to otherwise would have been expected to
amortize its unfunded pension liabilities in contribute.192 Reducing the amount that
the formula.
districts are expected to contribute increases
The continuing appropriation for CPS’s normal the funding gap that the State is supposed to
costs and the recognition of its payments to cover, so the State would end up paying for a
amortize its unfunded liabilities are an portion of unfunded pension liabilities.
important step towards pension parity
These provisions are currently working as
between CPS and all other school districts.
they should to remedy the pension parity
In addition, the new law addresses how other issue between CPS and the rest of the State.
school districts’ pension costs would be However, if the State wanted to shift pension
treated if the State shifted responsibility for costs down to local school districts (as was
pension contributions to local school proposed in Governor Rauner’s FY19 budget
districts.190 If local school districts became proposal), which would increase local
responsible for the normal cost of their accountability for pension costs they incur,
pensions, districts would be allowed to count policymakers should be aware that the way
that cost as part of their Adequacy Target (the the formula is structured currently would
amount of funding a district needs each make it so that the State would still be
year).191 Since the formula determines the responsible for paying at least part of districts’
percentage of funding the district is supposed pension costs.
to contribute locally (taking into account the
property wealth and ability to pay in the Property Tax Relief Pool
district) and the State is supposed to fill the
The funding increases called for by the new
gap between that amount and the Adequacy
school funding formula are incremental – the
Target, the State will still end up paying a law calls for $350 million increases in State
portion of the normal cost of pensions for every funding each year until all districts reach
district. The share of the normal cost that the
adequacy. However, there is one provision of
State would end up paying is highest for low-
the funding formula, the Property Tax Relief
wealth districts and lowest for high-wealth
Pool Fund, which could divert as much as $50
districts. This is more equitable than current million a year away from the formula,
law where the State pays a higher amount for
potentially delaying the projected timeframe
pensions for wealthier districts than for low-
(10 years) for all districts to reach adequacy.
wealth districts.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 87


Illinois’ reliance on local property taxes to districts that are not as needy but are willing
fund education has led to major disparities in to forgo some revenues may benefit. FY19 is
how well school districts are funded. Districts the first year of the Property Tax Relief Pool
with more property wealth can tax Fund, which the State should monitor closely
themselves at lower rates and still have to ensure it is working as intended.
sufficient funding, but districts with low
property wealth have had to increase their tax Consistent Funding
rates to try to make up for the shortfall Unfortunately, given the State’s history of
between the resources they have locally, the underfunding education and prorating
funding they receive from the State, and their General State Aid (that is, appropriating less
total funding need. funding than the General State Aid formula
The Property Tax Relief Pool Fund aims to required and allocating partial payments to
decrease the tax burden for low-wealth, high- districts that had been cut on an across-the-
tax districts. School districts can apply to board percentage basis),194 it is not certain
reduce their Unit Equivalent Tax Rate that the State will fulfill its commitment to
(UETR)193 by up to one percentage point, and increase funding by $350 million each year.
the State Board of Education will provide a However, the State must ensure that all
grant to the district that covers part of the lost districts are properly funded so that students
property tax revenue. The grants are not a have greater opportunity to succeed.
dollar-for-dollar swap; the amount of grant Historically, Illinois has contributed far less to
funding a district would receive depends on education funding at the State level than most
the amount of tax reduction, as well as the other states. According to data from The
district’s local capacity percentage (the share Education Trust, only 40% of school funding
of funding the district is expected to comes from the State (rather than local
contribute locally). Districts with the highest sources), and only four states contribute
property taxes will get priority, and any smaller shares at the State level.195 This sort
unused portion of the fund will go through of funding inadequacy has contributed to a
the EBF formula. 27% achievement gap between low-income
However, it is unclear how the grant process and non-low-income students, meaning that
will play out or how much interest there will across all grade levels and subjects, the share
be from local school districts. Since the grants of low-income students whose scores are
do not provide a total offset of lost tax deemed “proficient” is 27 percentage points
revenue, school districts will have to weigh lower than non-low-income students.196 It is
their ability and willingness to give up some critical that the State keep its commitment to
funding. It is possible that districts that are far increase funding every year so that low-
from their adequacy targets will decide it is wealth districts have the resources they need
not in their interest to trade much-needed to improve outcomes for their students.
funding for a slight tax decrease. As such, the
low-wealth, high-tax districts for whom the
grants are intended may not apply, and

88
The Every Student Succeeds Act
The Every Student Succeeds Act (ESSA) is a
federal law with several different
components, one of which is to provide
School Improvement Grants to schools that
require additional support. The grants are
funded by the federal government and are
intended to provide supplemental funding to
provide additional support to struggling
schools.

Because of the State’s history of inadequate


funding (particularly during the years of
proration), schools that received these grants
were essentially receiving money from the
federal government through the front door
while losing State money out the back door.
With the new school funding formula focusing
State money on the neediest schools, the
School Improvement Grants provided through
ESSA may finally be truly supplemental as
they were intended, allowing schools to make
long-term, sustainable changes. Again, it is
critical that the State fund the formula fully so
that schools receiving additional federal
support have the opportunity to make
sustainable improvements.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 89


90
Workers’ Compensation within the “course and scope” of employment
to fall under workers’ compensation, but the
Reforms standards for what constitutes the “course
and scope” of employment vary significantly
Workers’ compensation reform is needed to by state (e.g., some states specifically mention
improve the jobs climate in Illinois. Each state that travel to or from work does not fall under
has its own unique rules and regulations, but this definition). In addition, some states
in general workers’ compensation insurance require additional causation standards that
covers the cost of medical care and address the issue of pre-existing conditions
rehabilitation for employees injured on the and the extent to which they contributed to
job and compensates them for lost wages. In the workplace injury:
return, employees give up the right to sue the
Causation threshold: If a pre-existing
employer for injuries caused by the
condition contributed to the work-related
employers’ negligence or on the job.
injury, is there a causation threshold that
Companies often consider the cost of workers’ must be met for the claim to be covered
compensation insurance in a given state when under workers’ compensation (e.g., must
deciding where to locate, making it an the work-related incident account for 50%
or more of the injury)?
important component of a state’s jobs climate.
Historically, Illinois has been a higher-cost state Apportionment: If a pre-existing condition
for workers’ compensation premiums and, contributed to the work-related injury, are
despite recent cost reductions resulting from there provisions that apportion workers’
reforms enacted in 2011, the State continues to compensation benefits based on the
portion due to the new injury?
have several components of its workers’
compensation laws that make it an outlier. The Illinois has a relatively broad causation
State should enact additional reforms that standard, requiring only that the injury
would bring Illinois’ workers’ compensation stemming from employment is a cause of the
structure more in line with other states and injury. Once that standard has been met, no
continue to reduce workers’ compensation further causation threshold or apportionment
costs to employers, while maintaining is applied; the injury is compensable under
appropriate coverage and compensation for workers’ compensation.
employees injured on the job.
Florida, by contrast, requires that work-
related injuries must be the “major
Workers’ Compensation Overview
contributing cause” of the injury for it to be
Broadly, there are three determinants of compensable. That is, an injury is only
workers’ compensation costs: causation, compensable under Florida’s workers’
medical care costs, and indemnity benefits. compensation system if the work-related
injury “remains more than 50 percent
Causation responsible for the injury as compared to all
Causation standards determine whether an the other causes combined.”197 If an injury
injury is compensable; that is, whether it will meets the high causation threshold, it is fully
be covered by workers’ compensation compensable under Florida’s workers’
insurance or the employee’s regular health compensation system.
insurance. The injury must have occurred

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 91


Many states take a more middle of the road Illinois’ utilization, both in terms of number of
approach than Illinois or Florida. States such as visits per claim and the number of services
Indiana and Connecticut will deem an injury per visit, is also a factor in its high medical
compensable under workers’ compensation if it costs. Many states limit utilization of services
is related to work and the scope of like chiropractic care, physical therapy, and
employment. However, they also take into occupational therapy, but Illinois does not.
account the degree to which the workplace According to the WCRI, Illinois continues to
incident contributed to the overall condition and have one of the highest utilization rates
apportion benefits accordingly (e.g., if an among study states.200
employee had a pre-existing knee condition and
that same knee was injured further at work, the Indemnity Benefits
employer’s workers’ compensation insurance is Indemnity benefits are intended to
only responsible for the portion of the injury compensate workers for lost wages when
that occurred in the workplace). they are unable to work due to injury. They
include temporary disability benefits for
Medical Care Costs
workers who are recovering from injuries, as
Medical care costs are another contributing well as permanent disability benefits for those
factor to Illinois’ high workers’ compensation whose injuries cause permanent impairment.
costs. According to the Workers’
Illinois’ indemnity benefits per claim were
Compensation Research Institute (WCRI),
$22,911 compared to the median state’s cost
Illinois’ medical costs for claims with more
of $17,815 (these figures are adjusted for
than seven days of lost time are 24% higher
injury/industry mix and wages).201 Three
than the median for comparison states.198
factors that contribute to Illinois’ higher
This is driven by two factors:
indemnity costs include:
Medical prices: the maximum allowable fees
Weekly benefit amounts;
for workers’ compensation claims. Most
states regulate prices through medical fee Duration of benefits; and
schedules; and
Benefits for permanent disabilities.
Utilization: the amount of provider visits
and/or services provided for each workers’ Temporary Disability Benefits
compensation claim. The more visits or
Injured workers are paid temporary total
services used per claim, the higher the cost
disability (TTD) benefits when they are unable
of that claim.
to return to work (or they are allowed to do
Illinois has a medical fee schedule, but unlike light duty work, but their employer cannot
many other states, it is not linked to Medicare accommodate them). Benefits are set at 66
rates. Overall, Illinois’ medical fee schedule 2/3% of the worker’s average weekly wage,
rates are 74% higher than Medicare rates, but subject to minimum and maximum limits.
there is quite a bit of difference between There is no statutory limit on how long an
types of services. Illinois’ fee schedule rate for employee may receive temporary disability
major surgery is 296% higher than the benefits.
Medicare rate; the rate for evaluation and
management services is only 3% higher than the TTD benefits are paid until the injured worker
Medicare rate.199 recovers completely or achieves maximum

92
medical improvement (MMI). MMI is the point Permanent Disability Benefits
at which the injured worker’s condition has
If a work-related injury results in permanent
stabilized and no other improvement is
physical loss, a worker will receive permanent
expected, even with additional medical
disability benefits, either Permanent Total
treatment. Once a worker reaches MMI, an
Disability (PTD) or Permanent Partial Disability
assessment can be made as to whether
(PPD).
permanent impairment exists.
If the injury results in permanent total
Temporary disability benefits tend to be high in
disability,205 the worker will receive a benefit
Illinois, contributing to the State’s high indemnity
equal to two-thirds of their average weekly
costs. TTD benefit costs tend to be higher
wage before they sustained the injury (subject
because of higher weekly benefit amounts, as
to minimums and maximums) for life.
well as a longer duration of TTD benefits.
If the injury results in permanent partial
Illinois’ weekly TTD benefits tend to be high
disability (e.g., permanent loss of function
because Illinois has a higher statutory
of a body part), they are eligible for PPD
maximum for these benefits, even after
benefits. PPD benefits cover four main areas:
adjusting for wage differences. Most states tie
their TTD benefit amounts to the wages a Wage differential benefits – if the employee
worker was earning prior to their injury (as obtains a new job that pays less than their
noted above, it is 66 2/3% in Illinois), subject to a pre-injury wage, they may be entitled to a
maximum amount that is tied to the Statewide wage differential award.
Average Weekly Wage (SAWW). Illinois’ Schedule injuries – State law includes a
maximum is set to 133 1/3% of the SAWW, while schedule of injuries that sets a value on
most comparison states set their maximum at certain body parts (expressed as a
100% of the SAWW. 202 number of weeks of compensation).206
The value of an injury is determined
Workers’ compensation claims in Illinois also by multiplying the percentage of loss
tend to have a longer duration of temporary of the injured body part by the weeks
disability benefits compared to study states. of compensation, then multiplying
On average, Illinois workers are out of work the resulting number of weeks by
for 20 weeks, compared to 14 weeks in the 60% of the employee’s average
average comparison state.203 This is likely due weekly wage.
to a combination of factors: 1) there is no o For example, the loss of a thumb
statutory limit on how long someone can is worth 76 weeks of
receive TTD benefits (many states have limits), compensation according to the
and 2) workers receive significantly higher schedule – if an employee was
maximum TTD benefits compared to what earning $500 a week,
they would receive for Permanent Partial they would be entitled to 60%
Disability. This gap in benefits may create an of that wage times 76 weeks, or
incentive to delay the transition from $22,800.
temporary to permanent disability benefits.204 Non-schedule injuries – if an injury is not
included on the schedule of injuries, the
employee may be entitled to benefits for
loss of “the person of the whole.” The

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 93


calculation for determining compensation Workers’ Compensation Premiums
is similar to scheduled injuries, with a
maximum value of 500 weeks of Workers’ compensation premiums are the
compensation. costs faced by employers to provide
insurance for work-related injuries to their
Disfigurement – an employee who suffers a
employees. The premiums reflect the costs
serious and permanent disfigurement
(both medical care and indemnity benefits) an
may be entitled to benefits based on the
insurer is likely to face if there is a workers’
value of the disfigurement. Calculating the
value is similar to scheduled injuries, with compensation claim. The premiums can vary
a maximum of 162 weeks. significantly from state to state depending on
each state’s workers’ compensation laws, as
A determinant of PPD benefits is the degree to
well as across industries.
which use of a body part is lost due to the injury.
In some states, PPD benefits are based on Premiums are based on the “pure premium”
medical impairment only; in Illinois, they may be (the amount of premium necessary to pay for
based on up to five factors (one factor may not workers’ compensation claims) and the
be the sole determinant of PPD benefits): “expense load factor” (the amount necessary
to cover the insurer’s expenses, taxes, and
Medical impairment reports (based on the
profit) for different occupational classes.
American Medical Association’s “Guide for
These two factors represent the total costs
the Evaluation of Permanent
that workers’ compensation insurers face, and
Impairment”);
together represent a “manual rate,” which
Occupation of the injured employee; provides a recommended rate for insurers to
Age at the time of injury; charge. In most states, including Illinois, the
manual rate is determined by the National
Future earning capacity; and
Council on Compensation Insurance (NCCI).209
Evidence of disability corroborated by the
treating medical records. However, insurers may modify the manual
rates based on other factors, such as
According to the WCRI, PPD benefits in Illinois
premium discounts for quantity purchases,
are typically viewed as a settlement after a
experience modification factors, and premium
worker gets to maximum medical
discounts for policies carrying deductible
improvement and tend to be paid out in lump
features. As a result, even when a state
sums (rather than weekly PPD benefits).207
experiences reductions in its workers’
Forty percent of injured workers in Illinois
compensation costs (as Illinois did after
received lump-sum settlements for claims
reforms were enacted in 2011), the rates
with more than seven days of lost time, which
insurers charge may not fully reflect those
is higher than most other PPD benefit states.
cost reductions.
In addition, PPD benefit settlements tend to
be higher than other states. For 2014/17
Past Reform Efforts
claims, Illinois’ average lump-sum payment
per claim was $29,844, compared to $24,376 In an effort to reduce workers’ compensation
for the median state. 208 costs, the General Assembly passed a package
of reforms in 2011. The 2011 reforms made the
following significant changes to Illinois’ workers
compensation system:

94
Reduced medical fee schedule rates by 30%; Illinois now has the 22nd highest workers’
Created a preferred provider program compensation premiums in the country,
limiting workers’ choice of medical compared with the 8th highest in 2016.214
providers;
Since premiums had remained high for
Set utilization review standards; employers despite the 2011 reforms, the
Allowed the use of the American Medical Illinois General Assembly has frequently
Association’s “Guide for the Evaluation of considered additional workers’ compensation
Permanent Impairment” as one of the legislation. Most recently, in 2017, the General
factors in determining permanent Assembly passed two bills that primarily
disability benefits;210 address workers’ compensation premiums,
but not the underlying costs of workers’
Set limits on carpal tunnel permanency; and
compensation claims.
Established a cap on wage differential
benefits. HB2525, sponsored by Senator Raoul and
Representative Hoffman, focused on the
Immediately following the reforms, workers’
concern that insurance companies have not
compensation costs decreased. Prior to the
passed on savings to employers in the form of
2011 reforms, Illinois’ total cost per claim with
lower premiums. Its main provisions included
more than seven days lost time was 37%
“prior approval” of rates for insurers and
higher than the median state; afterwards, it
rating agencies, a repeal of provisions
was 19% higher than the median state.211
regarding the presumption that a competitive
However, despite the initial reduction in costs market prevents excessive profit, and
due to the 2011 reforms, Illinois continues to clarification of workers’ compensation for
have the highest total costs for all claims paid injuries related to employee travel.215 HB2622,
among study states: for all paid claims for introduced by Representative Fine and
2014/17, Illinois’ total costs per claim were Senator Biss, would have established the
$16,025, compared with $10,632 for the Illinois Employer Mutual Insurance Company,
median state.212 In addition, Illinois’ indemnity which aimed to reduce premiums through
benefit costs remain comparatively high at increased competition in the market.216
$22,911 per claim compared with the median
The two bills passed both chambers, but
state’s cost of $17,815 per claim.213
Governor Rauner vetoed them, noting that
The cost savings have also been reflected in they did not adequately address the structural
lower workers’ compensation premiums for flaws of Illinois’ workers’ compensation
businesses in Illinois. In 2010, before the system or represent “real reform.”217 (When
reforms, Illinois’ workers’ compensation the Senate was debating the components of
premiums were 49% above the median U.S. the so-called “Grand Bargain” in 2017, the
state; in 2016, Illinois’ premiums were 21% Governor pushed for workers’ compensation
higher than the median state. Premium rates reforms such as much stricter causation
in Illinois have continued to decrease and standards, but the parties did not come to an
were 6% higher than the median in 2018. agreement.)

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 95


Recommended Reforms Following best practices of other states
and tying its medical fee schedules to
Although the State has made progress in
Medicare rates;
reducing workers’ compensation costs, there
are still significant opportunities for Adopting limits on utilization of certain
medical services;
improvement. The State should make
additional reforms to become less of an Implementing best practices for reducing
outlier and align itself with the best practices the average length of temporary disability;
of other states by: and
Adjusting the use of AMA guides for
Defining traveling employees in statute
determining impairment so that AMA
(i.e., codifying the factors that determine
guides have more weight but are not
whether or not an employee is required to
mandatory.
travel for work);

96
Endnotes

1
level of general state government revenues) and that
“Chicago Technology Initiative Fact Pack,” p. 42. Updated
revenues and expenditures will be aligned, we estimate the
January 26, 2018. Prepared for the Civic Committee of the
reserve requirement would be between $4.5-5 billion in
Commercial Club of Chicago.
2024. Original Source: Standard & Poor’s, “US State Ratings
2
“Chicago Named Top Major City for Foreign Direct Methodology,” January 3, 2011.
Investment Strategy,” World Business Chicago, 12
“State of Illinois Pension Projections (TRS, SURS, SERS),”
http://www.worldbusinesschicago.com/chicago-top-foreign-
Brian Septon, FSA, The Terry Group. December 1, 2018.
direct-investment-strategy/. Accessed November 13, 2018.
13
3
Calculated as the Estimated FY19 General Funds
“Chicago Ranked Top Corporate Metro for Fourth
contribution (not including savings from the pension buyout
Consecutive Year,” World Business Chicago,
plans that were assumed in the enacted FY19 budget)
http://www.worldbusinesschicago.com/top-metro-four-
divided by General Funds expenditures from the enacted
years/. Accessed November 13, 2018.
FY19 budget. Sources: “Illinois State Retirement Systems:
4
Federal Reserve Bank of St. Louis, “Educational Attainment, Financial Condition as of June 30, 2017,” p.iii; Commission
Annual: Bachelor’s Degree or Higher by State,” 2016, on Government Forecasting and Accountability, “State of
https://fred.stlouisfed.org/release/tables?rid=330&eid=3914 Illinois Budget Summary: Fiscal Year 2019,” August 1, 2018,
44&snid=391458. Accessed October 26, 2018. p. 26.
14
5
Regional Transportation Authority, “2018-2023 Regional “State of Illinois Pension Projections (TRS, SURS, SERS),”
Transit Strategic Plan,” p. 14. December 2018.
15
6
The Civic Federation, “How Will Illinois Fund Its Tongxuan (Stella) Yang and Olivia S. Mitchell, “Public
Infrastructure Needs?” January 26, 2018. Pension Governance, Funding, and Performance: A
Longitudinal Appraisal,” Pension Research Council at the
7
Southern Illinois University, Paul Simon Public Policy Wharton School of the University of Pennsylvania, PRC
Institute, “Illinois Voters are Not Happy with the Direction of
Working Paper 2005-02, pp. 18,21. 2005.
the State: Not Much Influenced by the Recent Tax Cuts,”
16
March 5, 2018. Commission on Government Forecasting and
https://paulsimoninstitute.siu.edu/common/documents/opi Accountability, “FY2019 Liabilities of the State Employees’
nion-polling/simon-institute-poll/2018/3-5-18-simon-poll- Group Health Insurance Program,” March 2018, p. 15.
illinois-voters-not-happy-direction-of-the-state.pdf. 17
The proposed reforms aimed to make employees
8
Commission on Government Forecasting and responsible for 40% of costs and the employer responsible
Accountability, “State of Illinois Budget Summary: Fiscal Year for the remaining 60%. Ibid, pp. 3,5.
2019,” August 1, 2018, p. 160. 18
Projections provided by Senate Democratic Staff via email
9
Based on Civic Committee calculations. Original Data: on December 3, 2018.
Bureau of Economic Analysis, “GDP in Current Dollars: 19
Ibid.
Percent Change from Preceding Period, 2016-2017”; Bureau
20
of Labor Statistics, “Change in total nonfarm employment by Civic Committee calculations. Original data: Illinois
state, over-the-month and over-the year, seasonally Department of Revenue, Final 1040 IIT File, Tax Year 2015.
adjusted,” for December 2017-December 2018. August 2017.
10 21
State of Illinois Governor’s Office of Management and Commission on Government Forecasting and
Budget, “General Funds Financial Walk Down, FY19-FY24.” Accountability, “3-Year Budget Forecast, FY2019-FY2021,”
November 2018. March 2018, p. 11.
11
To get the highest score on the reserve fund component 22
Ibid, p. 11.
of S&P’s credit rating factors, a state must have a formal 23
8% of general state government funds (including General
budget-based reserve fund that is >8% relative to revenue
Funds and Other State Funds but not federal funds).
or spending. S&P looks at the reserve fund as a percentage
of general state government funds (including all general and 24
General and Special purpose governments include
special state funds but not federal funds). In FY19, Illinois’ counties, municipalities, townships, and special purpose
total appropriated funds revenues totaled $48.3 billion. governments (e.g., park districts). Source: State of Illinois
Assuming a 2.5% growth rate, that will reach $55 billion in Comptroller’s Office, “Fiscal Responsibility Report Card,
five years. Using $56 billion, an 8% reserve fund would be 2016,” Local Government Division, p. 17.
roughly $4.5 billion. However, assuming that part of the
25
State’s solution to covering its deficit and paying off unpaid This ranking is based off the premium rates of several
bills is through revenue increases (which would increase the different classes of employment, from clerical office
employees to iron and steel work. Source: Chris Day and Jay

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 97


42
“Mazda and Toyota Establish Joint-Venture Company
Dotter, “2018 Oregon Workers’ Compensation Premium ‘Mazda Toyota Manufacturing, USA, Inc.’,” March 8, 2018.
Rate Ranking Summary,” Department of Consumer and https://corporatenews.pressroom.toyota.com/releases/maz
Business Services, State of Oregon. October 2018. da+toyota+establish+joint+venture+company+mazda+toyot
a+manufacturing+usa+inc.htm. Accessed December 7,
26
Evelina Radeva, “CompScope Medical Benchmarks for 2018.
Illinois, 18th Edition,” Workers’ Compensation Research
43
Institute, October 2017, p. 13. Anna Marie Kukec, “Illinois Loses Out as Companies Move
Out,” US New and World Report, March 15, 2018.
27
For claims with >7 days lost time for 2014/17 (the first https://www.usnews.com/news/best-states/articles/2018-
year listed in the dates for claims indicates the injury year; 03-15/companies-want-out-of-illinois. Accessed December
the second year indicates the maturity of the claim). Evelina 7, 2018.
Radeva, “CompScope Benchmarks for Illinois, 18th Edition,”
44
Workers’ Compensation Research Institute, October 2017, Maria Ines Zamudio, “Population Loss in Illinois is Driven
p. 18. by Larger Numbers of People Leaving for Other States,”
WBEZ News, January 15, 2019.
28
Federal Reserve Bank of St. Louis, “Educational https://www.wbez.org/shows/wbez-news/population-loss-in-
Attainment, Annual: Bachelor’s Degree or Higher by State,” illinois-is-driven-by-larger-numbers-of-people-leaving-for-
2016, other-states/f1bf43a4-0e93-407c-8240-7c3b9d58547b.
https://fred.stlouisfed.org/release/tables?rid=330&eid=3914 Accessed January 24, 2019.
44&snid=391458. Accessed October 26, 2018.
45
The best practices (and therefore, categories and
29
Ibid. Accessed October 26, 2018. subcategories the Volcker Alliance grades states on) are
30
Intersect Illinois, “Workforce,” based on academic research and the Volcker Alliance’s State
https://intersectillinois.org/global-powerhouse/workforce/. Budget Crisis Task Force project. Source: The Volcker
Alliance, “Truth and Integrity in State Budgeting: What is the
Accessed October 26, 2018.
Reality?” 2017.
31
Intersect Illinois, “Economic Overview,”
46
https://intersectillinois.org/global-powerhouse/economic- Ibid, pp. 12-13.
overview/. Accessed October 26, 2018. 47
The Civic Federation, “Forecasting Revenue for the State
32
US Small Business Administration, Office of Advocacy, of Illinois,” April 20, 2018.
“Illinois Small Business Profile: 2016,” 48
State of Illinois Governor’s Office of Management and
https://www.sba.gov/sites/default/files/advocacy/Illinois.pdf. Budget, “General Funds Financial Walk Down, FY18-FY23.”
33
“Chicago Named Top Major City for Foreign Direct October 2017.
Investment Strategy,” World Business Chicago, 49
Governor’s Office of Management and Budget, “Illinois
http://www.worldbusinesschicago.com/chicago-top-foreign- State Budget: Fiscal Year 2019,” February 14, 2018, p. 31.
direct-investment-strategy/. Accessed November 13, 2018.
50
“Scoop and toss” refers to the practice of repaying
34
“Chicago Ranked Top Corporate Metro for Fourth maturing bonds by selling new long-term debt (thereby
Consecutive Year,” World Business Chicago, extending the time the state has to pay off the obligation).
http://www.worldbusinesschicago.com/top-metro-four-
51
years/. Accessed November 13, 2018. State of Illinois, “Official Statement: General Obligation
Refunding Bonds, Series of September 2018,” August 22,
35
“Chicago Technology Initiative Fact Pack,” p. 42. Updated 2018, pp. 31-32.
January 26, 2018. Prepared for the Civic Committee of the
52
Commercial Club of Chicago. The State’s contributions are currently lower than the
normal cost plus interest or the contribution level that
36
Ibid, pp. 21-22. would prevent the unfunded liabilities from growing. An
37 “actuarially determined” or “actuarially required”
Ibid, p. 6.
contribution would include this amount, plus a payment to
38
Ibid, p.14. amortize some of the unfunded liability.
39
CMAP, “On to 2050: Mobility,” 53
Commission on Government Forecasting and
https://www.cmap.illinois.gov/2050/mobility/freight. Accountability, “Illinois State Retirement Systems: Financial
Accessed October 26, 2018. Condition as of June 30, 2017,” March 2018, p. 34.
40
Shane Nicholson, “Illinois is the Heart of the U.S. 54
The Civic Federation, “State of Illinois FY2019 Budget
Interstate System,” Daily Herald, March 27, 2018. Roadmap: State of Illinois Budget Overview, Projections and
41 Recommendations for the Governor and the Illinois General
Chicago Department of Aviation, “O’Hare 21: The Vision,”
Assembly,” February 9, 2018, p. 41.
http://www.ord21.com/home/Pages/default.aspx. Accessed
October 26, 2018. 55
Ibid, p. 41.

98
75
The total increase in unfunded liabilities was $110.1
billion from FY96-FY17. Other factors resulting in higher
56
“Truth and Integrity in State Budgeting,” pp. 9, 39. unfunded liabilities include assumption changes and
57 demographics. Source: Commission on Government
Utah State Legislature. https://budget.utah.gov.
Forecasting and Accountability, “Illinois State Retirement
58
“Truth and Integrity in State Budgeting,” p. 40. Systems: Financial Condition as of June 30, 2017,” March
59 2018, p. 34.
The baseline budget shows the trajectory of expected
revenues and expenditures absent any major policy 76
The Governmental Accounting Standards Board (GASB)
changes. requires reporting the Actuarially Determined Contribution
60 (ADC) instead of the old standard, the Annual Required
State of New York, “FY2019 Enacted Budget Financial
Contribution (ARC). The ARC and ADC are similar in
Plan,” May 2018, p. 28.
function—they are ways to calculate a contribution in
61
The Civic Federation, “How Will Illinois Fund its compliance with actuarial practices and methods. Pension
Infrastructure Needs?” January 26, 2018. plans have a fair amount of latitude in terms of acceptable
62
amortization methods; the ADCs described in this report
Regional Transportation Authority, “2018-2023 Regional
are those calculated by the plans themselves according to
Transit Strategic Plan,” p.14.
their own standards.
63
The Civic Committee of the Commercial Club of Chicago, 77
Civic Committee calculations. Original data: Teachers’
Bringing Illinois Back: A Framework for our Future, May 2017.
Retirement System of the State of Illinois, “Actuarial
64
State of Illinois, “Official Statement: General Obligation Valuation and Review of Pension Benefits as of June 30,
Refunding Bonds, Series of September 2018,” August 22, 2017,” p. 4; State Employees’ Retirement System of Illinois,
2018, p. 28. “Annual Actuarial Valuation as of June 30, 2017,” p.3;
General Assembly Retirement System of Illinois, “Annual
65
Ibid, pp. 28-30. Actuarial Valuation as of June 30, 2017,” p. 14; Judges’
66
A recent court ruling in requires the State to pay Retirement System of Illinois, “Annual Actuarial Valuation as
retroactive step increases to State employees, which will of June 30, 2017,” p. 12; State Universities Retirement
cost approximately $400 million for FY19. The enacted System of Illinois, “Actuarial Valuation Report as of June 30,
budget does not appropriate for any of these costs. Ibid, pp. 2017,” p. 33.
31-33. 78
Calculated as the Estimated FY19 General Funds
67
Ibid, p. 11. contribution (not including savings from the pension buyout
plans that were assumed in the enacted FY19 budget)
68
State of Illinois Governor’s Office of Management and divided by General Funds expenditures from the enacted
Budget, “General Funds Financial Walk Down, FY19-FY24.” FY19 budget. Sources: “Illinois State Retirement Systems:
November 2018. Financial Condition as of June 30, 2017,” p. iii; Commission
69
“General Funds Financial Walk Down, FY18-FY23.” October on Government Forecasting and Accountability, “State of
2017. Illinois Budget Summary: Fiscal Year 2019,” August 1, 2018,
p. 26.
70
State of Illinois Governor’s Office of Management and
79
Budget, “Illinois Economic and Fiscal Policy Report,” A portion of the State’s pension contribution comes from
November 15, 2018. non-General Funds sources; the total pension contribution
across all funds is projected to be approximately $8.5 billion
71
Ibid. for FY19. Source: Illinois State Retirement Systems: Financial
72 Condition as of June 30, 2017,” p. iii.
The backlog peak occurred in November 2017. State of
Illinois Comptroller’s Office, “Backlog Voucher Report,” 80
This growth rate is the CAGR for projected contributions
August 22, 2018. from 2020-2045.
73
GOMB, “General Funds Financial Walk Down, FY19-FY24.” 81
The shift to local employers will cover TRS and SURS.
74 Source: Governor’s Office of Management and Budget,
The State uses a discount rate (equal to the expected
“FY2018 Operating Budget Book,” February 15, 2017, pp.
annual investment returns on pension assets) to calculate
176-177.
the present value of all future pension liabilities. This
determines what the State needs to contribute to its 82
The Civic Federation, “State of Illinois FY2019
pension funds each year to keep the unfunded liability from Recommended Operating and Capital Budgets: Analysis and
growing. If the State does not meet the Normal Cost plus Recommendations,” May 9, 2018, p. 17.
Interest amount, the difference between the State’s
83
contribution and the Normal Cost plus Interest amount is In order to be eligible as a “vested, inactive member,”
added to its unfunded liabilities. Source: R. Eden Martin and three criteria must be met: the member has terminated
Kirsten Carroll, “Illinois’ Pension Crisis and service, they have accrued sufficient service credit to be
Recommendations for Reform,” Taxpayers’ Federation of eligible for a retirement annuity, and they have not yet
Illinois, Tax Facts, October 2009. pp. 2-3.

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 99


analysis assumes the same return assumptions for the
received any retirement annuity. Source: State of Illinois, supplemental contributions as the State’s required
“Official Statement: General Obligation Refunding Bonds, contribution.
Series of September 2018,” August 22, 2018, p. E-32. 96
Total contributions represent the sum of all contributions
84
State of Illinois Governor’s Office of Management and until the funds reach 90% funded, plus contributions made
Budget, “General Funds Financial Walk Down, FY19-FY24,” to maintain 90% thereafter until 2075.
November 2018. 97
Tongxuan (Stella) Yang and Olivia S. Mitchell, “Public
85
“Assessing Illinois Pensions: An Examination of Illinois TRS, Pension Governance, Funding, and Performance: A
SERS, SURS,” Presentation to the Civic Committee on May 9, Longitudinal Appraisal,” Pension Research Council at the
2018. Brian Septon, FSA, Principal, The Terry Group. Wharton School of the University of Pennsylvania, PRC
Working Paper 2005-02, p. 21, 2005.
86
Ibid.
98
Ibid, p. 18.
87
Constitution of the State of Illinois, Article XIV:
99
Constitutional Revision, Section 2. Thomas J. Fitzpatrick IV and Amy B. Monahan, “Who’s
Afraid of Good Governance? State Fiscal Crises, Public
88
Ibid. Pension Underfunding, and the Resistance to Governance
89
The unfunded liabilities of the five pension systems peak Reform,” Federal Reserve Bank of Cleveland, Working Paper
in 2028 at approximately $146 billion. Source: “Illinois State no. 12-23, p. 30, 2012.
Retirement Systems: Financial Condition as of June 30, 100
Amanda Kass, “The Illinois Comptroller is Withholding
2017,” p. 105. Funds from a Chicago Suburb, and Other Towns Could
90
Katherine Loughead, “How Well-Funded are Pension Plans Follow,” April 15, 2018.
in Your State?” The Tax Foundation, May 17, 2018. https://amandakass.blog/2018/04/15/the-illinois-
https://taxfoundation.org/state-pensions-funding-2018/. comptroller-is-withholding-funds-from-a-chicago-suburb-
and-other-towns-could-follow/. Accessed December 5,
Accessed December 5, 2018.
2018.
91
The interest the State needs to pay each year to keep the 101
unfunded liability from growing is the discount rate times Rebecca Susmarski, “Pensions Account for 67 percent of
the unfunded liability. If that amount isn’t met, it is added to City Property Tax Revenue,” The Register-Mail, August 26,
the unfunded liability. By increasing contributions to a level 2018.
that reduces the unfunded liability, the total amount of https://www.galesburg.com/news/20180826/pensions-
account-for-67-percent-of-city-property-tax-revenue.
interest will be reduced.
Accessed December 5, 2018.
92
Contributions are set at a level percent of payroll from
102
2011-2045. If more funding is added to the pension funds Civic Committee Calculations. Source: Illinois Department
upfront, required contributions for the remaining years of of Insurance, Public Pension Division, “2017 Biennial Report
the payment schedule will decrease to keep them at a level (2015-2016),” p. 5, October 1, 2017.
percent of payroll (since the goal of 90% funded by 2045 103
The Civic Federation, “Illinois FY2019 Budget Still Faces
remains the same). Major Hurdles,” October 5, 2018.
93
Before any policy decisions are made with respect to 104
Sara Burnett, “Illinois Pension Buyouts May Not Bring
pension funding, analysis should be verified by the actuaries Savings Budget Claims,” Associated Press, June 1, 2018.
of the pension plans and be analyzed using an enterprise-
105
wide stress testing. All projections are for policy analysis State of Illinois, “Official Statement: General Obligation
purposes only. Refunding Bonds, Series of September 2018,” p. E-33,
August 22, 2018.
94
Because the supplemental contributions are outside the
106
pension funds and do not cause payments to be adjusted “FY2019 Liabilities of the State Employees’ Group Health
to fit the 90% goal (as the statutory payment schedule Insurance Program,” p. 15.
would if additional money were deposited directly into the 107
The Civic Federation, “Governor’s FY2019 Budget
funds), funding would be projected to reach 93.4% by 2039 Depends on Benefit Cost Shift,” February 23, 2018.
for an additional $2 billion a year and 89.6% by 2034 for an
108
additional $4 billion a year. This analysis assumes the first Commission on Government Forecasting and
supplemental payment would be made mid-year in FY2020. Accountability, “State of Illinois Budget Summary: Fiscal Year
2019,” August 1, 2018, p. 26.
95
Contribution amounts are in 2018 dollars (assuming 2.5%
109
inflation). “Total state contribution” is calculated as the sum Governor’s Office of Management and Budget, “Illinois
of all pension contributions (including supplemental State Budget: Fiscal Year 2019,” February 14, 2018, p. 31.
contributions) from FY2020 until FY2065. From 2045 to 110
GRS Retirement Consulting, “Illinois State Employees
2065, contributions will only be the normal cost plus
Group Insurance Program, GASB Statement No. 75,
interest amount required to maintain 90% funding. This

100
percent of GSP were 14th highest. Source: Bringing Illinois
Accounting and Financial Reporting for Postemployment Back: A Framework for our Future, p. 12.
Benefits Other than Pensions (Actuarial Valuation Report as 126
Of particular note is the State’s relatively low federal
of June 30, 2016),” pp. A1-A2. match on Medicaid spending for those who were eligible
111
The Civic Federation, “Court Ruling on Health Insurance before the expansion of Medicaid under the Affordable
Could Add to State of Illinois Budget Woes,” July 9, 2014. Care Act. Illinois’ Federal Medical Assistance Percentage
(FMAP) is ranked 42nd and the State gets roughly $1 for
112
Ibid. every $1 spent by the State for this population. The State
113 with the highest FMAP, Mississippi, gets roughly $3.25 for
Ibid.
every $1 it spends on this population. The FMAP is
114
“FY2019 Liabilities of the State Employees’ Group Health calculated using a formula that takes into account the
Insurance Program,” p. 24. average per capita income for a state relative to the national
115 average. Source: The Kaiser Family Foundation, “Federal
This figure represents the present value of SEGIP
Medical Assistance Percentage (FMAP) for Medicaid and
retirement benefits (on average) for new employees, which
Multiplier: FY19,” https://www.kff.org/medicaid/state-
includes healthcare, dental, vision, and life insurance
indicator/federal-matching-rate-and-
benefits. It assumes that the new hire is 30 years old and
multiplier/?currentTimeframe=0&sortModel=%7B%22colId
will be Medicare eligible. It is calculated using the plan’s
%22:%22Location%22,%22sort%22:%22asc%22%7D#.
discount rate and medical trend assumptions. Source:
Accessed October 24, 2018.
Analysis prepared for the Civic Committee by the Terry
Group for policy analysis purposes. These results should 127
Based on FY16 state and local government financial data
not be relied on for other purposes and any actuarial from the Census Bureau. Since data is from FY16 (when the
analysis should be verified by the system itself. State’s personal and corporate income taxes were lower), it
116 has been adjusted to reflect today’s current tax rates.
The Pew Charitable Trusts, “State Retiree Health Care
Source: Taxpayers’ Federation of Illinois.
Liabilities: An Update,” September 19, 2017.
128
117 Jared Walczak, Scott Drenkard, and Joseph Bishop-
Meeting with David Johnson, Partner, Franczek Radelet
Henchman, “2019 State Business Tax Climate Index,” The
PC. October 3, 2018.
Tax Foundation, 2018. p. 3.
118
Governor’s Office of Management and Budget, “Illinois 129
For example, North Carolina is another flat tax state
State Budget: Fiscal Year 2019,” February 14, 2018, p. 64.
whose tax rate is approximately .5 percentage points higher
119
David F. Merriman, Chuanyi Guo, and Di Qiao, “No Magic (5.499% rate), and its ranking was 16th out of all states.
Bullet: Constructing a Roadmap for Illinois Fiscal 130
The State is not obligated to meet the 7:5 ratio. The
Sustainability,” Institute of Government and Public Affairs at
Illinois Constitution prohibits a ratio of more than 8:3, but
the University of Illinois, March 1, 2018, p. 4.
does not require the State to raise personal and corporate
120
State of Illinois Comptroller’s Office, “Fiscal Responsibility income tax rates proportionately. Source: Illinois
Report Card, 2016,” Local Government Division, p. 17. Constitution, Article IX, Section 3(a).
121 131
“State of Illinois Budget Summary: Fiscal Year 2019,” The corporate income tax is comprised of two parts: the
August 1, 2018, p. 26. base rate, which goes into State coffers, and the Corporate
122
Personal Property Replacement Tax (CPPRT), which is
US Census Bureau, “2012 Census of Governments.”
collected by the State but is distributed to local
123
The Local Government Distributive Fund (LGDF) governments. The base rate is currently 7%; the CPPRT is an
disburses State income tax revenues to localities according additional 2.5% surcharge. Source: Bringing Illinois Back: A
to a formula. The General Assembly included $1.25 billion Framework for our Future, p. 17.
for LGDF deposits in the FY19 budget. Source: Commission 132
For example, someone who inherits an IRA (and is
on Government Forecasting and Accountability, “State of
required by law to take distributions from that IRA) would
Illinois Budget Summary: Fiscal Year 2019,” August 1, 2018,
not have to pay taxes on any of that income.
p. 23.
133
124
Civic Committee calculations. Original data: Illinois
The total state sales tax rate of 6.25% can be broken
Department of Revenue, Report IDs TDWR-IITEOY-002 and
down into two pieces: 5% goes into State coffers and the
TDWR-IITEOY-017, Tax Years 2007-2015.
remaining 1.25% is distributed to local governments
134
according to a formula. Civic Committee calculations. Original data: Illinois
125
Department of Revenue, “Illinois Individual Income Tax:
In FY14, the most recent year of data available with
Retirement Subtraction- Tax Year 2015,” Final 1040 IIT
income tax rates comparable to today (before the
Return File (August 2017).
temporary income tax increase expired in 2015, the rate
was 5%; today it is 4.95%), Illinois’ revenues as a percentage
of GSP were below the national average but its taxes as a

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 101


148
Morgan Scarboro, “Does Your State Levy a Capital Stock
135
This figure assumes a 5.95% personal income tax rate. It Tax?” The Tax Foundation, October 5, 2017.
also assumes no means testing beyond the current 149
“Illinois Business Taxes: Identifying Where Illinois is an
exemption phase out levels in place ($250,000 for single Outlier,” p. 104.
filers, $500,000 MFJ).
150
Commission on Government Forecasting and
136
Technically, Illinois’ “sales tax” is actually a combination of Accountability, “3-Year Budget Forecast, FY2019-FY2021,”
four taxes: the Retailer’s Occupation Tax (ROT), the Use Tax, March 2018, p. 11.
the Service Occupation Tax (SOT), and the Service Use Tax
151
(SUT). The four taxes are generally collectively referred to as Jared Walczak, “State Inheritance and Estate Taxes: Rates,
the Sales Tax. Source: Source: Natalie Davila, Terry Crumly, Economic Implications, and the Return of Interstate
Mike Klemens, Tom Johnson, and Mike Scaduto, “Illinois Competition,” The Tax Foundation, Special Report No. 235,
Business Taxes: Identifying Where Illinois is an Outlier,” p. 7. July 2017.
2015, p. 44. 152
“3-Year Budget Forecast, FY2019-FY2021,” p. 11.
137
The State portion of the sales tax is 5%, but it also 153
There were several iterations of federal estate or
collects an additional 1.25% that is distributed to local
inheritance taxes prior to 1916, but they were all temporary.
governments.
Source: Jeffrey A. Cooper, “Interstate Competition and State
138
Jared Walczak and Scott Drenkard, “State and Local Sales Death Taxes: A Modern Crisis in Historical Perspective,”
Tax Rates 2018,” The Tax Foundation, Fiscal Fact No. 572. Pepperdine Law Review, Vol.33, Issue 4, 2006.
February 2018. 154
Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson,
139
This figure does not include excise taxes the State levies. “The Estate Tax: Ninety Years and Counting,” Internal
Including excise taxes would bring Illinois’ ranking up to 25th. Revenue Service, p. 120. https://www.irs.gov/pub/irs-
Data provided by the Taxpayers’ Federation of Illinois. soi/ninetyestate.pdf.
155
140
Illinois Department of Revenue, “Excise Tax Rates and Jeffrey A. Cooper, “Interstate Competition and State
Fees,” Death Taxes: A Modern Crisis in Historical Perspective,”
https://www2.illinois.gov/rev/research/taxrates/Pages/excise Pepperdine Law Review Vol. 33, Issue 4, p. 857. May 15,
.aspx. Accessed November 13, 2018. 2006.
156
141
This survey looks at whether services are taxed, not how “State Inheritance and Estate Taxes: Rates, Economic
they are taxed (e.g., whether a service is subject to a general Implications, and the Return of Interstate Competition,” p. 7.
sales tax vs. an excise tax). Source: Federation of Tax 157
Ibid, p. 8.
Administrators, “FTA Survey of Services Taxation – Update,”
158
By the Numbers, July-August 2017. According to the authors of the study, federal estate tax
142
returns are the only kind of data available that provides
It is a widely held principle that products should only be
information on a significant number of wealthy people and
taxed on the final sale to avoid taxing on top of a tax (as
their locations. Source: Jon Bakija and Joel Slemrod, “Do the
could occur if inputs are taxed too), or “tax pyramiding.”
Rich Flee from High State Taxes? Evidence from Federal
“Illinois Business Taxes: Identifying Where Illinois is an
Estate Tax Returns,” National Bureau of Economic Research,
Outlier,” p. 47.
Working Paper 10645, July 2004. p. 4.
143
The Commission on Government Forecasting and 159
The average effective state estate and inheritance tax
Accountability considers full compliance to be 90%. This is
rate for each wealth class is defined as the combined
based off of academic research, as well as discussions with
federal and state estate and inheritance tax liability as a
the National Conference of State Legislatures and the
share of net worth, less what it would be in a state with only
Illinois Department of Revenue. Source: Commission on
a “pick up” estate tax. Ibid, pp. 5, 11.
Government Forecasting and Accountability, “Service Taxes
160
2017 Update,” January 2017, p. 9. Federal estate taxes reflect the reported state of
144
residence at the date of death, which may or may not reflect
Ibid, p. 11.
where high wealth individuals actually lived (state rules
145
Capital-based taxes are sometimes calculated on assets governing establishing residency vary). Ibid, pp. 4, 15-16.
or net worth of a business; sometimes they are based on 161
The study does not address the reason for the change in
the capital stock of the company. Source: “Illinois Business
migration pattern, rather, it only measures the estimated
Taxes: Identifying Where Illinois is an Outlier,” p. 99.
impact of that migration. Source: John Havens, “Migration of
146
Paid-in capital refers to capital contributed to a Wealth in New Jersey and the Impact on Wealth and
corporation by investors through purchase of stock from Philanthropy,” Center on Wealth and Philanthropy, Boston
the corporation. College, January 22, 2010. p. 2.
147
Ibid, p. 102.

102
Performance: Evidence from Indiana,” Center for Business
162
“Illinois Business Taxes: Identifying Where Illinois is an and Economic Research at Ball State University, August 15,
Outlier,” p. 88. 2017.
177
163
Current rankings are based on Civic Committee DuPage County, “DuPage ACT Initiative Overview,”
calculations using data available as of September 2018. https://www.dupageco.org/ACTInitiative/. Accessed October
Previous rankings are based on data available as of 16, 2018.
November 2016. Original Data: Bureau of Economic 178
Ulrich Boser, “Size Matters: A Look at School District
Analysis, “GDP in Current Dollars: Percent Change from Consolidation,” Center for American Progress, August 2013.
Preceding Period, 2016-2017”; Bureau of Economic Analysis,
179
“SA1 Personal Income Summary: Personal Income, Lt. Governor Evelyn Sanguinetti, “Journal of Local
Population, Per Capita Personal Income, 2017”; Bureau of Government Shared Service Best Practices, Second Edition,”
Labor Statistics, “Local Area Unemployment Statistics State of Illinois, July 31, 2018.
(seasonally adjusted), June 2018”; Bureau of Labor Statistics, 180
State of Illinois Comptroller’s Office, “Filing
“State and Area Employment, Hours, and Earnings (total
Requirements,” https://illinoiscomptroller.gov/financial-
nonfarm, seasonally adjusted), June 2018”.
data/local-government-division/about-the-local-
164
State of Illinois Governor’s Office of Management and government-division/filing-requirements/. Accessed October
Budget, “General Funds Financial Walk Down, FY19-FY24.” 16, 2018.
November 2018. 181
“Fiscal Responsibility Report Card,” p. 15.
165
Email from Chris Mier, CFA, Managing Director, Analytical 182
Transform Illinois, “2018 Spring Session Recap,”
Services Division, Loop Capital. October 17, 2018.
https://www.transformillinois.org/legislation. Accessed
166
US Census Bureau, “2012 Census of Governments.” October 16, 2018.
183
167
General and Special purpose governments include North Carolina Local Government Performance
counties, municipalities, townships, and special purpose Measurement Project, “Final Report on City Services for
governments (e.g., park districts). Source: State of Illinois Fiscal Year 2015-2016: Performance and Cost Data,” May
Comptroller’s Office, “Fiscal Responsibility Report Card, 2017, pp. 3-8.
2016,” Local Government Division, p. 18. 184
Marc Holzer, John Fry, Etienne Charbonneau, Norma
168
Civic Committee calculations. Original source: “Fiscal Riccucci, Sunjoo Kwak, and Eileen Burnash, “Literature
Responsibility Report Card” pp. 19, 21, 24. Review and Analysis Related to Measurement of Local
Government Efficiency,” Local Unit Alignment,
169
Ibid, p. 18. Reorganization, and Consolidation Commission. Rutgers
170
Calculated as aggregate property taxes paid for owner- University- Newark School of Public Affairs and
occupied residences divided by the value of those homes. Administration, May 6, 2009, p. 17.
Data provided by the Taxpayers’ Federation of Illinois. 185
State of Illinois, “The Evidence-Based Funding for Student
171
Average local tax rates are calculated as a weighted Success Act,” PA 100-0465.
average. Source: “State and Local Sales Tax Rates 2018,” 186
“How the Property Tax Relief Pool Fund Drives Equity,”
February 2018. Advance Illinois, p.1. June 9, 2018.
172
Illinois Department of Revenue, “Annual Report of 187
“CPS Fiscal Year 2019 Budget- Pensions,” Chicago Public
Collections Remitted to the State Comptroller,” December Schools, https://cps.edu/fy19budget/Pages/pensions.aspx.
2017. Accessed September 12, 2018.
173
The Civic Federation, “Update: How the State of Illinois 188
Ibid.
FY2019 Enacted Budget will Affect Local Governments,” June
189
14, 2018. “Senate Bill 1947 Frequently Asked Questions,” Funding
Illinois’ Future. http://fundingilfuture.org/wp-
174
Civic Committee calculations. Source: Illinois Department content/uploads/2017/09/SB1947_FAQ_092617.pdf.
of Revenue, Property Tax Statistics, “Table 3: Property Tax Accessed September 12, 2018.
Extensions by Type of District, 2015-2016,” and “Table 4:
190
Number of Taxing Districts by Type, 2007-2016.” “Shifting responsibility” includes everything from a full
normal cost shift (as was proposed in the Governor’s FY19
175
Douglas J. Gagnon and Marybeth J. Mattingly, “Limited budget), to responsibility for normal costs for new
Access to AP Courses for Students in Smaller and More employees going forward (e.g., Tier 3), to the new
Isolated Rural School Districts,” Carsey Research National requirement for employers to cover the cost of pensions
Issue Brief #80, University of New Hampshire Carsey School above the 3% “spiking” cap.
of Public Policy, Winter 2015.
191
Currently, this provision does not apply to any school
176
Skrikant Deveraj, PhD, Dagney Faulk, PhD, and Michael J. district.
Hicks, PhD, “School Corporation Size and Student

RESTORE ILLINOIS: A FOUNDATION FOR GROWTH 103


Radeva, “CompScope Benchmarks for Illinois, 18th Edition,”
192
The formula determines the funding a school district is Workers’ Compensation Research Institute, October 2017,
supposed to contribute locally, which is the “Local Capacity p. 18.
Target.” The law provides that districts with unfunded 202
Ibid, pp. 20-21.
pension liabilities may subtract their payment to amortize
203
the unfunded liability from their Local Capacity Target, Ibid, p. 22.
which increases the gap the State must cover over time. 204
Ibid, pp. 22-24.
Currently, this provision only applies to CPS because it is the
205
only district responsible for its unfunded pension liabilities. Either a complete disability that renders an employee
193
unable to work or the complete loss of use of both hands,
The Unit Equivalent Tax Rate converts the school
both arms, both feet, both legs, both eyes, or any two parts,
district’s operating tax rate to a uniform rate that accounts
e.g., one leg and one arm. Source: State of Illinois, 820 ILCS
for discrepancies in the number of grades served by each
305/8(f).
type of school district. Source: “How the Property Tax Relief
206
Pool Fund Drives Equity,” Advance Illinois, p.3. June 9, 2018. State of Illinois, “Permanent Partial Disability Benefits:
194
Schedule of Body Parts,”
The new formula has a contingency plan for
https://www2.illinois.gov/sites/iwcc/Documents/ppdschedul
underfunding. If the State does not appropriate enough
e.pdf. Accessed November 14, 2018.
money to cover the Base Funding Minimum, the most
207
adequately funded districts will lose money they’ve gotten “CompScope Benchmarks for Illinois, 18th Edition,” p. 24.
through the formula first. If that is not enough to cover the 208
Ibid, p. 25.
shortfall, all districts would lose dollars on a per-pupil basis
(rather than a percentage basis, as was the case with 209
“Oregon Workers’ Compensation Premium Rate Ranking:
proration). Source: “Senate Bill 1947 Frequently Asked Calendar Year 2016,” Central Services Division, State of
Questions,” Funding Illinois’ Future. Oregon, p. 6. December 2016.
http://fundingilfuture.org/wp- 210
When determining partial permanent disability (PPD)
content/uploads/2017/09/SB1947_FAQ_092617.pdf.
benefits, Illinois allows five different factors to be
Accessed September 12, 2018.
considered, including the AMA guide. However, the law does
195
“The State of Education Funding in Illinois,” The Education not allow any of the five factors to be the sole determinant
Trust. https://edtrust.org/graphs/?sname=Illinois. Accessed of PPD benefits.
January 29, 2019. 211
Comparison years for claims were 2008/2011 and
196
“Illinois- Summary PARCC Performance by Low Income, 2012/2015. “CompScope Benchmarks for Illinois,” p. 6.
Non Low Income- Composite,” Illinois Report Card, ISBE. 212
Ibid, p. 12.
https://www.illinoisreportcard.com/state.aspx?source=trend
s&source2=achievementgapparcc&Stateid=IL. Accessed 213
Ibid, p. 18.
September 12, 2018.
214
Chris Day and Jay Dotter, “2018 Oregon Workers’
197
State of Florida Statute §440.09 (1b). Compensation Premium Rate Ranking Summary,”
198 Department of Consumer and Business Services, State of
Evelina Radeva, “CompScope Medical Benchmarks for
Oregon, p. 2. October 2018.
Illinois, 18th Edition,” Workers’ Compensation Research
Institute, October 2017, p. 13. 215
Illinois General Assembly, House Bill 2525, 100th General
199 Assembly.
Ibid, p. 204.
216
200 Illinois General Assembly, House Bill 2622, 100th General
Ibid, p. 7.
Assembly.
201
For claims with >7 days lost time for 2014/17 (the first 217
year listed in the dates for claims indicates the injury year; Governor’s Veto of HB2525, August 25, 2017.
the second year indicates the maturity of the claim). Evelina

104
RESTORE ILLINOIS:
A FOUNDATION FOR GROWTH